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spk09: Hello and welcome to today's Egeo Q2 2022 financial results conference call. My name is Elliot and I'll be coordinating your call today. If you would like to register a question during the presentation, you may do so by pressing star followed by one on your telephone keypad. I would now like to hand over to Sumit Simha with Egeo. The floor is yours. Please go ahead.
spk01: Good afternoon. Thank you for joining the Egeo Second Quarter 2022 Financial Results Conference Call. This call is being recorded today, August 8, 2022, and will be archived on our website for approximately 10 days. Let me start by quickly covering the safe harbor. We would like to remind everyone that we will be making forward-looking statements on this call. Forward-looking statements are all statements that are not strictly statements of historical fact, such as our priorities, our expectations, are operational plans, business strategies, secular trends, product and feature functionalities, pro forma results, acquisition activities, and contributions from acquired businesses. Actual results could differ materially from those contemplated by a forward-looking statement, and reported results should not be considered as an indication of future performance. For more information, please refer to the risk factors discussed in our periodic filings, including our most recent annual Form 10-K and quarterly reports on Form 10-Q. The forward-looking statements on this call are based on information available to us as of today's date, and we disclaim any obligation to update any forward-looking statements except as required by law. Joining me on the call today are Bob Lyons, our President and CEO, and Dan Bonsell, EVP and CFO. Bob will start today's call with a brief discussion of the results and an update on our business and integration with Edgecast. Dan will then review financial results and guidance. Following that, Bob will use the remainder of the time to discuss aspects of our strategy and corporate initiatives going forward. I will now turn the call over to Bob.
spk08: Thank you, Samit, and welcome, everyone. It has been less than two months since we closed on the acquisition of EdgeCast and formed Egeo. We remain very excited about this transformational combination. Egeo is now a more diversified, edge-enabled solutions company and has assembled the building blocks to improve profitability and accelerate growth. In the second quarter of 2022, we continued to build on three previous scores of positive momentum with revenue of $74.3 million and improvement of 54% year-over-year. LimeLight contributed $61.5 million, demonstrating 27% organic year-over-year growth across all aspects of our core business. EdgeCast contributed an additional $12.8 million. We expanded our capacity by approximately 10% at line length, largely in support of the forecasted needs later this year. This capacity was ordered in the fall of 2021, and when combined with the acquired HCaTS capacity, we have mitigated previously highlighted supply chain concerns. We are well positioned for continued growth through this year and into next year, albeit resulting in a temporary gross margin impact for this quarter. We expect gross margins to continue improving sequentially going forward. Our pipeline also continues to grow, already up 50% this year, and heavily focused on our high-margin, high-growth app ops opportunities. In the weeks since closing, we have successfully implemented the first phase of our integration plan. Our initial diligence indicated at least $50 million in synergies, half of which would be achieved in the first two quarters after close. Post-closing, our deeper analysis has resulted in an expanded synergy opportunity of at least $50 million. Of that, We have already achieved $17.5 million well ahead of plan. All of these are planned to be net run rate savings. We have also completed the first detailed 2023 bottom-up profitability and revenue outlook for the combined companies. There is more work to be done before we can lock in our 2023 plan and provide solid guidance. However, we do feel it is important to provide some clarity on our turnout look. We expect 2023 revenue to be is somewhere between $550 and $560 million with an adjusted EBITDA that exceeds $65 million. This would imply year-over-year revenue growth of approximately 44% and adjusted EBITDA margin expansion from 4% in 2022 to 12% in 2023. Currently, this outlook does not include commercial synergies or platform utilization improvements, providing additional upside opportunity and downside risk cash. At last year's Analyst Day, we committed to taking bold steps to become a leading edge-enabled solutions provider. We outlined what we believe to be a large unmet market opportunity to provide edge-enabled solutions that simplify development for builders and meaningfully improve speed and security for operators. We have, in fact, delivered on that commitment. We currently offer three solutions, Egeo Atos, which includes security, Egeo Delivery, and Egeo Streaming. Each solution boasts best-in-class capabilities and each benefits from our massively-scaled Edge platform. AppOps, currently representing approximately 20% of revenue, is expected to support significant high-margin growth for us. This solution is made up of our App Edge, App Security, and App Platform products. Collectively, they provide the most powerful, comprehensive cloud security suite, development platform, and application CDN in the world. We believe this solution will be highly disruptive in the emerging high-growth Web 3.0 sector. We have successfully completed the first phase of our broader security strategy and have the most complete web application and API protection product in the market. Our solution includes DOS, WAF, and bot management capabilities, and we have displayed competitive solutions at Accenture, Scripps, Symantec, Verizon, and Citibank, to name a few. In mid-July, our security product afforded a 355 million packet-per-second DDoS attack, one of the largest attacks ever recorded. The client had no impact at all. Our delivery solution boasts approximately 230 terabytes per second of edge capacity delivered through more than 300 POPs across the globe, making us the second largest and most performant in the world. We have also added 10 terabytes of additional capacity this quarter and are able to offer combined limelight and edge cast capacity seamlessly to our clients. This enables us to provide clients with high performance capacity that was previously not possible and positions us well for continued organic growth going forward. Streaming may prove to be the most underrated solution in our portfolio. Representing approximately 25% of our revenue, NGO Streaming handles mission-critical applications for some of the most demanding and well-known companies. Our streaming solution can capture viewer usage and experience data wherever the viewer goes, enabling us to continuously improve viewer experience in real time. In fact, we will manage more than 30,000 live events and insert over 50 billion ads for clients this year alone. My conversations with our streaming clients indicate our solution is meeting or exceeding their evolving needs as new content and seasonal event rosters rapidly expand. We continue to work through our strategic planning process and look forward to unpacking our strategy for this compelling set of capabilities in greater detail at our analyst day. Our best-in-class solutions, powered by our massively scaled and highly performing edge platform, positions us well to benefit from sector tailwinds such as Web 3.0, security threats, cord cutting, linear streaming TV, and gaming. In short, we continue to successfully execute on our multi-year transformational plan. In the past 12 months, we have successfully completed two acquisitions, overhauled all aspects of our operating model, removed $50 million of costs, and implemented a new growth-oriented commercial team. Our solutions are demonstrating proof of value, our clients continue to do more with us, and our strategy benefits from sector tailwind. We believe all of this supports a business that will continue to capture market share and sustain growth. As we look beyond our planning period, we remain confident in our ability to be a growth-oriented technology company with a greater than 60% gross margin, 15% EBITDA, and positive free cash flow. We will continue to be unwavering in this pursuit. At our upcoming analyst day, we will go into greater detail unpacking our strategy, operating plans, and financial roadmap. We plan on announcing more details soon and are finalizing that date so you can mark your calendars. At this time, I will turn the call over to Dan to unpack second quarter finances.
spk07: Thank you, Bob. Revenue for the second quarter was $74.3 million, up 54% from the second quarter of 2021 and our third consecutive quarter of double-digit percentage revenue growth over the prior year. Limelight contributed $61.5 million, supporting a 27% year-over-year growth and edge cast contributed $12.8 million for the 16 days the results were included. Proforma gross margins expanded to 38.4% up from 32.7% in the second quarter of 2021, an increase of 570 basis points. We added over 10 terabits per second of capacity during the second quarter in order to support expected growth in traffic. As traffic ramps and utilization improves and we realize synergies from the integration of EDGCAS, we expect continued gross margin expansion over the next few quarters. Proforma operating expenses, excluding stock-based compensation, restructuring, and acquisition-related expenses, were $28.9 million for 39% of revenue, up from 32% last year. The increase in operating expenses is driven by the inclusion of EDGCAS expenses post-June 15th close. Second quarter acquisition and legal related charges in connection with the EDGCAST transaction were approximately $14 million. Also, immediately following close, we began taking steps to implement our target operating model, resulting in a restructuring charge of approximately $4.4 million, primarily related to severance benefits for 51 employees across the business. This will result in estimated annualized savings of over $10 million. As Bob mentioned, we already have realized $17.5 million in annualized synergy savings and expect to realize an additional $40 million plus of synergies. Second quarter 2022 adjusted EBITDA was slightly below break-even due to the incremental spend on capacity added during the quarter as well as additional operating expenses from EDGCAST. Cash and marketable securities total $76 million, an increase of $15.4 million from the first quarter of 2022. We have an existing unused $25 million credit facility and the ability to upside that based on the added edge cash collateral. We spent $13 million for capital expenditures in the quarter. Our liquidity position today is stronger than it was before the acquisition. We believe that our current balance sheet and target operating model provides adequate liquidity and the strength to continue investing in our business as capital markets continue to tighten and recessionary fears continue. We have and will continue to take aggressive cost actions further strengthening our balance sheet. Accounts receivable increased to $108 million due to approximately $50 million of receivables from edge caps. We have reviewed the agent in detail, and as expected, it is composed of high-quality blue-chip customers with strong credit history. We expect CSO to be in the 50 to 60-day range post-integration. For the full year 2022, we are updating our guidance as follows. We expect a revenue range of $380 million to $390 million and adjusted EBITDA range of $13 million to $60 million. These numbers capture the previously disclosed streaming client loss and assume 45% of overall revenue will be from high margin app ops and streaming solutions. We expect gross margins and adjusted EBITDA to continually improve throughout this year and next year as we realize the benefit of plan synergies, increased utilization, and diversified revenue mix. As we look beyond this year, our preliminary outlook for 2023 indicates a revenue range of $550 million to $560 million in adjusted EBITDA of at least $65 million. Beyond 2023, we continue to have confidence in our ability to achieve our longer-term objective of double-digit revenue growth, 60% gross margins, and 15% adjusted EBITDA, and with sustained positive free cash flow. With that, I will turn the call back over to Bob. Thanks, Dan.
spk08: We committed to taking bold steps toward greatly improving client and shareholder value, and we continue to deliver on that commitment. While we are no doubt proud of the progress we have made in shareholder, we remain focused on the opportunities in front of us and what is required of us to capture those opportunities. We are now one of the largest independent edge platforms in the world with unparalleled performance, security, live event, and streaming capabilities. While we are a client-first company, our products are, in fact, best in class. I'll close by sharing some observations we have across our industry and how that shapes our outlook. We currently do not see any weakness in the number of hours a day people have eyeballs on glass. We do see some subtle shifts in where they are viewing, but believe our current portfolio, which includes streaming, applications, gaming, and social media, positions us well to follow these eyeballs wherever they go. Our growth is no longer tied to streaming trends, but rather in our ability to capture market share. The aforementioned DDoS attack is indicative of a continued environment of risk for clients around the world. Larger, more sophisticated, high-stakes cybersecurity attacks make headlines every day. Delivering a secure experience is the only way to meet consumer expectations and continues to help differentiate Egeo across our app ops, delivery, and streaming solutions. We continue to see a large unmet need for outcome-based solutions versus tools. The tool sprawl is detrimental to productivity, speed, and security, and we are firmly positioned to address those needs for outcome buyers. This economic environment creates opportunities for companies that have momentum and a strong balance sheet. We have both, as well as a strong partner at Apollo who believes in our value creation strategy. We believe that our strengthening performance coupled with the challenging capital markets will provide us additional expansion opportunities to consider. We will remain inquisitive, and as always, will focus on deals that expand our relative scale, extend the use of our edge platform, expand our security capabilities, and that will immediately be accreted to shareholder value. We have made meaningful progress in the past six quarters and have delivered three quarters of year-over-year positive revenue growth. Our leading indicators support a continuation of this momentum with expected year-over-year growth of 44% in 2023 and continued improvement to gross margins and adjusted EBITDA. We continue to strengthen our team from the board through management, We are very excited to have added three new board members and the talent and expertise they bring to Egeo. We are also excited about the recent appointments, such as our chief information security officer and our chief legal officer. Egeo is quickly realizing our transformative vision and demonstrating our ability to improve profitability and growth. We have assembled the building blocks and established a foundation of solutions that have a clear right to win in a highly attractive $40 billion market. Our company continues to strengthen. We thank our investors for their continued support and look forward to working together to achieve what we know to be uniquely possible for us. With that, operator, please open up the lines for the question and answer session.
spk09: Thank you. For our Q&A, if you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. Our first question today comes from Mike Latimer from Northland Capital Markets. Your line is open. Please go ahead.
spk05: Great. Thank you. Yeah. Congratulations on all the news here. You know, diversification is an important part of the acquisition, I guess. As you look to the second half of the year, what would you expect your largest customer to contribute as a percent of revenue?
spk08: Yeah, hey, Mike, how you doing? It's Bob. I'll let Dan weigh in, but that was one of the key parts of this acquisition is that not only did we diversify our product revenue and have a higher mix of high margin revenue, but also client diversification. We'll only have one client above 10%, and that client will be around 13%. You can probably guess who that is. It's been traditionally a very large customer for us. Historically, they've been running closer to 30%, so that's significant, the concentration of a large client.
spk07: Yeah, the only other thing I would add there is, you know, the other large client from EDUCATS was Verizon. And we have them locked into a three-year contract based on agreements that we put in place along with the acquisition. They continue to be very strong in traffic, not only with their delivery service, but with their streaming service. And so that could be another one that gets up to that level, but that's a good thing based on the traffic we're delivering for them and how we're performing for them.
spk05: Great, great. And then, you know, you touched a little bit on the potential influence of the recession or inflation on consumer activity. What about just kind of, you know, enterprise sales cycles? Have you seen any changes there?
spk08: Yeah, that's a great question, Mike. Historically, in my experience, and what we've seen here as well, is that is where you tend to see enterprise sales cycles slow down. I mean, people are not spending money, they're holding on to it. Interestingly with us, our thesis on that is we definitely are seeing that, but when you look at our solutions, our solutions are really focused on giving more for less and reducing TCOs. So we actually believe that there's an opportunity for us to come in and provide a better answer where people can, you know, trim their budgets and still move their companies forward with better security, better performance, and better productivity. And so we've actually spent a lot of time with our marketing team putting together campaigns that we started launching about 30 days ago that are really focused on that, you know, basically you can have more for less kind of campaigns. And so we're going to try to take advantage of that to the best of our ability. But that is a traditional thing in the enterprise sales is the sales cycles, you know, extending out basically.
spk06: Okay. Great. Good luck. Thank you.
spk08: Thank you.
spk09: Our next question comes from Frank Luthen from Raymond James. Your line is open. Hey, Frank.
spk02: Thank you. Hey, as you've looked at sort of the portfolio business out of Edgecast, any concern that either CDN customers may want to diversify a little bit more now that they maybe have some higher concentration of business with you? And then For next year on the CapEx, is it in a similar range as a percentage of revenue would we expect or would it be running a little higher initially? How should we think about that? Thanks.
spk08: Yeah, great. Thanks, Frank. I'll take the first one. That was actually one of the really important parts of this deal is that there was almost no overlap at all in customers, and so we don't see that at all. You might recall we had one client that overlapped, and that client actually wants to do more with us. They weren't a big client on either side. and actually liked the stability of Egeo better. So we're actually expanding that client meaningfully. And so we've had actually the opposite effect. We had no overlap other than that. And I would say that probably overall the sentiment is, geez, Egeo is a much more stable company than the two individual ones were given where they were. And so they're willing to lean in more. They look at us as a true alternative to maybe somebody else in the market that they're a little heavier weighted on today. That was that one. I'm sorry, what was the second question again?
spk02: On the CapEx, is this next year expected to be a similar percentage of revenue, or will it start out a little higher before you get into the longer term?
spk08: Yeah, I'll tell you how we think about it qualitatively, and then how it shows up quantitatively will come out as we give better guidance later in the year. But if you think about the two factors, we definitely expect the company to get better at reducing our capital intensity. Historically, as you know, we've run at 10%. That will reduce for two reasons. One, as we have a higher concentration of revenue that's non-CDN related, you know, those are low CapEx businesses. And so you generally are going to have a lower percentage of revenue on CapEx, number one. And then number two, the investments that we've been making in Linux and other things actually reduces that. And then a third thing is our Edge Extend product actually allows us to have more capacity without having to spend the CapEx. So those are the three things that we're driving. We see very good early indicators and early success in all three of those things. And as we go into next year, there's a point in which we definitely get better at CapEx and get more efficient at that. We're not really willing to call it yet because there are so many opportunities available to us to invest in the short term to get very quick payback. And we want to make sure we capture all those things because it translates into getting that gross margin where we want to get it to. So I would say as we get closer to the end of the year, we'll have a better idea there. But generally speaking, we will get more efficient with CapEx. The only question really is the timing and how much, and we're not ready to call that yet.
spk02: Okay, and where are you as far as the percentage of complete on the Linux conversion?
spk08: So we've actually done the completion of putting it in production, and really now it's a rollout conversation. And so it's a combination of getting the equipment and then also making sure that we roll it out without creating any kind of impact. Particularly going into Q3 and Q4, we're having more traffic. We've got to do that thoughtfully and take advantage of that. You know, as far as a specific timeframe, you know, I would say we're in the probably second or third inning of a nine-inning game.
spk02: Got it. Okay. Great. Thank you very much.
spk09: Yep. We now turn to David Martinucci from Lake Street. Your line is open. Please go ahead.
spk06: Hey, it's Eric Martinucci from Lake Street. Just a question regarding the gross margins in the quarter. It seems like you made this decision to do the capacity expansion, but was that after you had given the outlook for the quarter, or was this already baked in as you came out of Q1?
spk07: Yeah, so, you know, we added capacity, a huge amount of capacity in the quarter, 10 terabits. And so, you know, coming out of last year, we didn't have clear visibility into when we were actually going to get the equipment in order to add that capacity that we felt we needed for the second half of 2022 in order to support the volumes, to support the revenue forecast that we were rolling up. And so it just happened that we had a lot of CapEx that actually came in in order for us to build that out. during the quarter. And so, you know, we took that opportunity to roll that out without knowing exactly when the edge cast deal was going to close. As Bob mentioned, you know, we think that CapEx can come down in the second half of the year, 2023, by better utilizing the capacity that we've recently rolled out, but also better utilizing the edge cast capacity that we now have that we didn't know we were going to get, you know, as quickly as we did. And so as a company,
spk06: Gotcha. And then as far as you talked about a sequential improvement, a better utilization, Q3, Q4, what are we looking at as far as can you kind of narrow things down for us as far as that non-cash gross margin or that the cash gross margin expansion opportunity? Are we talking BIPs or are we talking, you know, 50 to 100 BIPs or is it a larger step up than that?
spk07: Yeah, I think we're pretty safe in saying that we expect greater than, you know, in the triple-digit BIPs worth of sequential gross margin improvements as we continue to increase and build on that utilization and then increase the amount of revenue that's coming from the higher margin app ops revenue as well as streaming too.
spk06: Okay, and then the last question for me is around the incremental synergies. It's terrific to hear. 60 million of synergies from the edgecast acquisition up from 50 million. Where is, what's the source of that incremental synergy?
spk08: So it's a combination of a couple of things. A big part of that synergy is actually going straight to the gross margin line. When you look at, you know, we have a stack of servers sitting in the same building as edgecast had maybe two rows apart from each other in the data center, and we can collapse those. We have a lot more pricing power now in these centers as well. And so it was really, before we could close, there was only so much information we can get our hands on. Once we were able to close, we were able to let the engineers really get under the covers and dig in and look. And the good news was is that we found that our initial estimate was a little bit more conservative. And so we were able to take more of that bottom line. So it's largely just taking advantage of the redundancy, the natural redundancy in the system and other opportunities that are related to that. you know, bandwidth costs and then obviously COLO savings.
spk06: Yeah, thanks for taking my questions.
spk09: Thank you. As a reminder, to ask any further questions, please press star 1 on your telephone keypad now. Our next question comes from Jeff VanRee from Craig Hallam. Your line is open. Please go ahead.
spk03: Great. Thanks for taking my questions, guys. Congrats. Looks really good. So a couple for me. I want to follow up on Eric's a second on the gross margin side. I think you had outlined a number of things. You thought you could grow 10% to 15%, 50% gross margins, 10% to 15% on EBITDA margins and positive free cash flow over, quote, the near term. When you were originally talking about edge cash, obviously you've had some lumpiness in terms of the timing of the capex and other items, but I guess simply put, has the timing to 50% gross margin changed based on your best estimate right now?
spk08: No, I don't think so. I think there's really a few things that are probably a little different than where we came in. I think one, as you know, we had the large streaming customer leave right before closing, so that certainly didn't help. We came to learn that there was lower utilization on the edgecast network than we expected that's not a terrible thing it is in the short term but uh you know it gives us the capacity we need to really grow the business so that's an okay conversation and uh and those are really the two biggest drivers and then of course the capacity that came online that we had to anticipate last year uh that we needed to buy it to make sure that we could support the revenue numbers that we want to hit in the back half of the year so those are really the three things that came together all those very manageable um what we've done is we've we've basically put our target operating model in place that gets us to that 50-plus percent gross margin, and then we've laid against that all of the savings that we have planned. We have Alex Partners in helping us do that, and we've got a very tight process around, you know, savings and how it ties into these gross margins, and we track it on a weekly basis in a war room, you know, kind of a PMO call. So we're pretty confident we can get there. A little bit of a different starting point for those reasons that I mentioned, but we'll get to the same outcome.
spk03: Yep, got it. And then you mentioned a pipeline number up, I think if I caught it up, 50%. Just to be clear, was that X, Edgecast, and then on that same topic, overall bookings, did they meet your expectations and any variance within what you booked?
spk08: Yeah, so the pipeline 50%, when you actually unpack this, it's all limelight pipelines, so that doesn't include anything with Edgecast. And the app ops pipeline is actually up triple digits. So it's heavily concentrated towards the app ops side of things, which we want, you know, for the reasons that we all know. So that's good. And then bookings, yeah, we actually, I think we slightly beat our bookings against plan in the quarter and then, you know, ramping up to do the same thing in this quarter. So we, you know, our bookings are tracking where we expect it to track. And nothing, you know, other than watching sales cycle times, which haven't impacted us yet, but it's a natural thing to watch, as pointed out earlier, we really don't see any headwinds there.
spk03: Okay, great. I'll leave it there. Thanks for taking my questions.
spk08: No problem. Thanks.
spk09: Our next question comes from Rudy Kessinger from DA Davidson. The line is open. Please go ahead.
spk04: Hey guys, thanks for taking my questions. Also on gross margins, I'm curious for 2023, within that preliminary outlook that you gave, is there kind of a gross margin on the cash gross margin range we can expect that's baked in there for 2023 that you can share?
spk07: On 2023, we're not ready to go into that level of detail. We do believe that we'll need We'll leave the year in excess of 50% margins. It'll be a gradual step up in order to get there. And so you can take that as sort of your how that rolls out.
spk04: Got it. And then with, you know, I think it's at 45% of the business now, you know, being more recurring. Just can you update us on what the kind of seasonality will be from here as we think about kind of the Q4 to Q1 and, you know, the Q1 to Q2 and et cetera? And then secondly, Edgecast, do you have the revenue number that they did in the first half of 2022 and how much came from that streaming customer that left the other month as well?
spk08: Yeah, I'll take the first one, Rudy, and then, Dan, I'll let you take the second one. So the first one around seasonality, as you know, our business historically has been kind of prone to seasonality given the limited nature of our strategic focus. There are really two factors that are going to help us offset that. One is obviously the recurring revenue, AppOps business 50%. That makes a big impact. But in addition to that, when you look at the traditional streaming revenue that Edgecast had, it's largely focused on live events. Live events have a complementary seasonality. People watch sporting events in the fall, summer. and spring, and our peak time was largely in the wintertime. So those two factors will help us smooth out seasonality. I don't think we're ready yet to say how much, but we do anticipate that we'll see a more smooth revenue profile going forward for those two reasons.
spk07: Yeah, and as far as the streaming customer goes, we suppose that they were about $25, $26 million last year We had them in the plan through our diligence procedures at a little bit over 30. And so it was ramping from the end of last year into this year. And so it was probably less than $20 million in the first half and greater in the second half.
spk01: That's helpful. Thanks, guys.
spk09: This concludes our Q&A.
spk08: Sorry, I was just going to say, one other point. We talked about in previous calls that our objective is to get to sequential quarter-over-quarter consistent growth, and so far we've been able to do that. That's kind of what we're trying to go towards, so seasonality doesn't even become a factor in the conversation too much.
spk09: This concludes our Q&A. I'll now hand it back to Bob Leon, CEO, for final remarks.
spk08: Okay, great. Thank you, Elliot. Thank you, everyone, for joining us today. We look forward to sharing our progress and continuing our conversations with analysts and investors, and have a great day.
spk09: Today's call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines.
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