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spk03: Today, ladies and gentlemen, welcome to the AGO 2022 third quarter financial results conference call. At this time, all participants are in a listen only mode. At the end of the prepared remarks, we will provide instructions for those interested in entering the queue for the question and answer session. I will now turn the call over to Samit Sinha, VP Investor Relations and Corporate Development.
spk09: good afternoon thank you for joining the edu third quarter 2022 financial results conference call this call is being recorded today november 9 2022 and will be archived on our website for approximately 10 days let me start by quickly covering the safe harbor we'd like to remind everyone that we will be making forward-looking statements on this call except for statements of historical fact forward-looking statements include but are not limited to our priorities our expectations are operational plans, business strategies, secular trends, products and feature functionalities, non-GAAP results, acquisition activities, and contributions from acquired businesses. These statements are not guarantees of future performance, and undue reliance should not be placed on them. Forward-looking statements are based upon what management believes are reasonable assumptions, and actual results could differ materially from those contemplated by our forward-looking statements, 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 from this call are based on information available to us as of today's date, November 9, 2022, and we disclaim any obligation to update any forward-looking statements except as required by law. The company prepares its financial results in accordance with accounting principles generally accepted in the United States of America. In addition to the GAAP financial measures, the company may also present certain non-GAAP financial measures, including non-GAAP net income, EBITDA, not just an EBITDA, non-GAAP gross profit, and non-GAAP gross margin. The company believes that non-GAAP financial measures are important supplemental measures of operating performance. The company's presentation of non-GAAP financial measures does not replace the presentation of the company's financial results in accordance with GAAP. And non-GAAP financial measures should not be construed as substitutes for or better indicators of the company's performance than the most directly comparable GAAP measures. Joining me on the call today are Bob Lyons, our CEO, and Stephen Cumming, our new CFO. Bob will start today's call with a brief discussion of the results, an update on our business, and a solution structure. Stephen will then review financial results and guidance. Following that, Bob will use the remainder of the call to summarize our strategy and corporate initiatives going forward. I will now turn the call over to Bob. Bob, the floor is yours.
spk12: Thank you, Sumit, and welcome, everyone. The third quarter was the first full quarter of our transformational combination with EDGECAST. We remain very excited about this combination, which has expanded our scale and further diversified our edge-enabled solutions, both key building blocks to improve profitability and accelerate growth. Before I jump into the details of the quarter, I want to welcome Stephen Cummings, who joins us as our CFO. Stephen has led an exemplary career as a finance executive at a variety of technology companies and has a strong history of creating shareholder value. He brings a depth of experience and knowledge critical to our plan to make Egeo a leading platform solutions company powering speed, security, and simplicity at the edge. In the third quarter of 2022, we continue to build on our four previous quarters of positive momentum with revenue of $121.2 million and increase of 119% year over year. We made good progress in increasing utilization of our excess capacity from the second quarter, which drove up non-GAAP gross margin 140 basis points quarter over quarter. Adjusted EBITDA was a loss of $3.2 million, largely driven by the anticipated edge-cast impact that we were addressing with planned operational synergies. Let's review some of the highlights from the quarter. First, we continue building awareness about Egeo and our solutions across the industry. We are starting to capture industry recognition that will help us continue building commercial momentum. Just last week, CyberSec Asia recognized us as a rising star in security after its survey of hundreds of CISOs and cybersecurity practitioners. We are proud of this achievement and will continue to build on it. Our pipeline has grown high double digits from the beginning of the year. and even more robustly for our strategic recurring high-growth revenue application solutions. Our pipeline includes major global brands that understand the demonstrative value our solutions offer. These opportunities are at various stages, including many in active proof of concept. Bookings of our application solution this quarter were our highest to date, and we are on track to grow that number meaningfully in the fourth quarter driven by our security solutions. We signed our first eight-figure deal with a leading security company and also deployed our application solution into one of the world's largest fintech companies, displacing a major competitor. These customers chose Egeo due to our unique ability to seamlessly integrate scale-enabled performance, security, and programmability at the edge. We are excited to see these early wins from our large tech-savvy companies, further validating the efficacy of our strategy and our solutions. Given our ongoing pipeline growth and bookings trajectory, we remain confident in our ability to continue accelerating our commercial momentum going forward. Second, we are making meaningful progress on improving profitability. On the second quarter call, we increased our annualized run rate synergy estimate from $50 million to $60 million. To date, we have achieved over $20 million against this estimate and are well ahead of plan. We continue to identify additional synergies and will provide further updates as we operationalize them. These synergies are run rate in nature, are focused on both gross margin and operating expenses, and will continue to support profitability improvements well into next year. Third, we continue to integrate the combined capabilities of our Layer 0 and EDGECAST acquisitions. We now have a much more complete set of solutions with a credible right to win. Let me take a few minutes and share some highlights. Our applications platform offers a suite of products that provide a one-stop shop for developers looking to build the third generation, highly performant, and secure web properties. This meets the need to improve performance, productivity, and protection across distributed architectures, which have increased complexity, latency, and attack services. Most sites on the internet are failing Google's Core Web Vitals benchmark, and our solutions offer industry-leading sub-second websites that improve business outcomes for our customers. Relations for tax are on the rise, And the size, pace, and sophistication of the task continues to escalate. We are handling some of these large attacks on digital properties around the world across highly sensitive verticals such as e-commerce and financial services. Last year, we outlined our plan to become more relevant in the cybersecurity market where they focus on automation and machine learning. These capabilities are vital to any modern cyber strategy and are required for companies to get appropriate protection from their RAS, DDoS, and bot management investments. Our acquisitions of Layer Zero and Edgecast have enabled us to execute on that strategy, and we are now a credible provider of a leading web application and API protection product. We will further expand the value of this platform with the upcoming launch of our advanced bot solution currently in beta. This approach has proven to be a differentiator for us and enables us to take market share as evidenced by the two wins and rapidly growing pipeline we have highlighted. In addition to performance and security, our application solutions allows development teams to ship twice as fast. Today, more than 70% of IT budgets are spent on maintenance and plumbing rather than focused on growth initiatives. Our solutions enable developers to eliminate the agency costs associated with tool sprawl, allowing them to spend more time building things that create business value. In short, our application solutions powers the fastest websites in the world, reduces the attack surface, all while lowering operational costs for customers. Performance, protection, and productivity were the pillars of the strategy we outlined a year ago and remain the pillars of our existing value proposition today. We believe we are well on our way to becoming the platform of choice for builders to productively power the fastest and most secure web properties. Our media platform has the capacity to deliver approximately 250 terabytes per second to more than 300 cops across the globe, making us the second largest and most performant network in the world. Our media products continue to benefit from secular tailwinds as consumers cut the cord. According to eMarketer, we are at an inflection point where non-pay TV households are expected to surpass pay TV households in 2023. The most recent report from Nielsen indicates a new milestone where, for the first time, streaming minutes have exceeded that of cable and broadcast. Additionally, sporting events are quickly moving toward 100% streaming now, as we saw with Thursday Night Football. COVID-driven content constraints continue to abate, and it is also worth mentioning that we now support all of the major gaming consoles. Uplink, our solution for streaming, provides an industry-leading set of features that reduces the complexity of mission-critical tasks for media companies, further entrenching our platform in their workflows. The value of our platform is best articulated by the recent feedback that we received from a leading media customer who said, we would need 10 times the current staff if we did not have your platform available to us. We will continue to invest in this solution and look forward to Uplink quickly returning to its place as the gold standard. We believe there is an opportunity to improve customer and shareholder value simultaneously with the new pricing model that shares economic benefits created through better platform utilization. We are also transforming some of our capacity to be embedded and directly delivered from ISP networks. This model improves the performance and quality for the viewer, reduces energy consumption, and supports better margins overall. We are maniacally focused on performance and customer support and know that doing so will allow us to earn more share of our clients' spend. These actions all support our ability to continue growing while improving our profitability and cash flow. As you can see, we have taken and continue to take steps to strategically align our company with secular tailwinds that benefit from an edge-enabled solutions platform that natively powers speed, security, and simplicity. We have established a right to win, and this is supported by a go-to-market team that is aggressively targeting the funnel at the top and bottom. I am proud to say that our product efficacy shines during competitive evaluations, and we win a disproportionate percentage of proof of concepts with some of the most sophisticated companies in e-commerce, technology, and fintech. We will continue fine-tuning our go-to-market motions to further accelerate new logo wins, upsells, and cross-sells to both our direct sales teams and channel partners. At this time, I will turn the call over to Stephen to share third quarter financials.
spk01: Thank you, Bob. Revenues for the third quarter 2022 was $121.2 million, up 119% from the third quarter of 2021 and 63% quarter over quarter. This includes the first full quarter of revenues contributed from the EDGECAST acquisitions. Our application solutions achieved our best booking quarter, and our pipeline continues to be very strong, driving momentum into the fourth quarter. Moving to gross margin, non-GAAP gross margin, which excludes the impact from stock-based compensation, acquisition-related expenses, and depreciation, expanded to 39.8%, up from 38.4% in the second quarter of 2022. an increase of 140 basis points, and flat versus the year-ago quarter. The sequential improvement was primarily due to increased capacity utilization and synergy realization. Non-GAAP operating expenses, excluding stock-based compensation, restructuring charges, acquisition and legal-related expenses, and depreciation were $51.4 million, or 42.5% of revenues up from 38.9% of revenues in the second quarter of 2022, as we included the first full quarter of EDGCAS operating expenses. We saw sequential leverage in SG&A, which declined from 27% of revenues to 24% quarter over quarter. R&D increased as a percent of revenue from 12% in the second quarter to 19% in the third quarter, due to additional headcount from EDUCAST, as well as hiring to drive new product innovation. We expect operating expenses will continue to benefit from cost synergies, which we anticipate to materialize over the next few quarters. Share-based compensation, including operating expenses, was $7.5 million, compared to $7 million for the second quarter. Restructuring charges were $4.1 million compared to $4.4 million for the second quarter of 2022. Acquisition and legal-related charges included in operating expenses in connection with the EDGCAST transaction were approximately $7.9 million compared to $14.2 million for the second quarter. Third quarter 2022 adjusted EBITDA with a loss of $3.2 million compared to a loss of $350,000 in the second quarter of 2022 and adjusted EBITDA of $6.1 million in the third quarter of 2021, primarily due to a full quarter of operating expenses from EDGECAST. Moving to the balance sheet and cash flow, Cash and cash equivalents and marketable securities totaled $70.8 million, a decrease of $6.6 million from the second quarter of 2022. Capital expenditure during the quarter was $2.2 million, or 1.8% of revenues, primarily due to more focused spending on higher margin business. In addition, we have mentioned earlier, we are benefiting from increased capacity in our network which minimizes the need for continued network build-out, reducing our capital expenditure requirements. Additionally, we've taken advantage of our increased scale and incremental collateral from the EDGECAST acquisition and have recently increased our borrowing capacity to $50 million from the previously undrawn $20 million credit facility. Our liquidity position today is now stronger than it was before the acquisition. We've strengthened our balance sheet, have now become a company with the scale to handle macroeconomic challenges and have the ability to continued discipline investments in our business to drive future growth. Now for an update on the integration. We've been busy integrating all aspects of Limelight and Edgecast and are already seeing the benefits in the improved capacity we can offer our customers. On the network front, We're using our increased scale and buying power to negotiate faithful rates with bandwidth providers and data center operators. We're also working on platform consolidation as well as reengineering some tasks to leverage the cash and compute on our network, which would further reduce third-party spend and ongoing CapEx requirements. On operations, we've made good progress on unifying our IT systems and building new processes that will provide us the scale to grow more profitably. This process is allowing us to assess spend in all areas of the organization and continue pursuing further efficiencies that will materialize into 2023, driving to our long-term goal of double digit adjusted EBITDA margins. Now moving to guidance. The fundamentals of our business are strong. We remain bullish on Egeo's transformation story and in our ability to drive long-term value creation for our shareholders. Having said that, the current macro environment has made us more cautious in the near term. We anticipate companies will delay or defer capital spending in the fourth quarter. This could impact our ISP deployment, which depend on capital investment from our clients. Additionally, While we're progressing well in the integration of our edge cash acquisition, we've seen some churn across a group of smaller customers. This is not unusual during acquisition of this magnitude. We see both of these as temporal in nature and have already taken steps to address them over the next few quarters. With this backdrop, we expect a more measured top line in Q4. Given our clear line of sight to where further synergies and efficiencies are available to us, We will prioritize improving on gross margin, adjusted EBITDA, and cash flow as we complete the integration of EdgeCast. Incorporating these trends into our guidance for the fourth quarter, we are expecting revenue range of between $109 to $114 million, adjusted EBITDA range of between a loss of $8 million to a loss of $6 million, This implies an adjusted EBITDA margin between negative 7.5% to negative 5.5%. In capital expenditure in the range of $2 million to $3.5 million, this implies CapEx as a percent of revenue of 2% to 3%. We will provide our 2023 guidance on the fourth quarter earnings call, which we expect to announce in February of next year. With that, I'll send the call back to Bob for some closing remarks.
spk12: In summary, the third quarter played out as anticipated. We continue to transform Egeo into the platform of choice that provides unmatched speed, security, and productivity at the edge. Our business fundamentals are strong and improving. When I joined the company, I shared my philosophy of investing in asymmetric risk. Today, as then, we have an unlimited upside, but must remain focused and disciplined in capturing the opportunities in front of us. Our integration efforts over this past quarter has enabled us to meaningfully diversify our revenue and establish ourselves as a credible security vendor. Our improved product positioning combined with planned sales improvements positions us well to benefit from secular tailwinds. We are tracking ahead of plan with our acquisition synergies and we remain laser focused on capturing further opportunities. We continue to strengthen our team from the board through management. We are excited to have added three new board members and three C-level executives. Building on this progress, we are in the final stages of hiring a chief marketing officer, and last week we added an experienced chief accounting officer to further bolster our fiscal rigor. Beyond these roles, we continue to build on the bench strength required to successfully execute on our transformative plan. All of this gives us confidence in our ability to grow while improving gross margins and adjusted EBITDA into 2023. We thank our investors for their continued support and look forward to working together to achieve what we all know to be uniquely possible for us. With that, operator, please open up the lines for the question and answer session.
spk03: Absolutely. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason at all you would like to move that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. The first question comes from Frank Lupin with Raymond James. You may proceed.
spk15: Great. Thank you. Can you quantify the customer losses in terms of annual revenue, and are we at the end of this, or is there more to come? And at what point can we see a positive EBITDA run rate?
spk05: Thanks. Hey, Frank.
spk01: This is Stephen here. Yeah, let me talk you through a little bit of the dynamics on EBITDA what's happened for our guidance for Q4. Firstly, I think it's worth noting, it's not uncommon when you make a large acquisition of this type, like Edgecast, that you experience some amount of customer churn. We are seeing some of that in the longer tail accounts within our Edgecast acquisition. And this is contained to a group, I would say, of smaller accounts. It's worth noting, in fact, that our top of strategic accounts, both in Limelight and Edgecast, show very healthy net dollar retentions. So this is contained into a smaller account base that really have not been given the attention they deserve as a result of, I guess, many different owners between Yahoo and Verizon. We're addressing that now, and we've increased account coverage and retention programs. We expect to have this corrected in a fairly short order. But secondly, we've also had a strategic initiative over the last few years to deploy more infrastructure deep within our networks, which we call Edge Extend, where we're basically deploying our CDN directly into our AFP network. You know, ISPs like it because they can serve traffic directly from their network, so the performance is better, and we do a red share with them so we can share the economics. So we get to expand capacity funded by the ISPs and it's a win-win all around. But this business is, I would say, a little bit more lumpy and sort of given the current macro environment, you know, capex budgets are being tightened and scrutinized. So I've tried to de-risk that in our guidance. I think it's important to note that we've seen this before and these things sort of snap back quickly. In terms of quantifying the numbers, I mean, we came in at 121. You know, we've guided down to somewhere around about 111 million. So I think that sort of gives you an idea of the run rate. Normally, you'd expect our seasonality to be slightly up in Q4, given the holiday patterns, et cetera. But I think sort of from where we were in Q3 to where we're sort of guiding now is the rough range. It's important also to note that we feel pretty good about our large account momentum, and we see great opportunities in the AppOps business as we go into 2023. In terms of EBITDA, we're going to give you guys a full update after we get through our Q4 results and come up with a comprehensive plan after another 90 days of consolidating the edge card acquisition. Bob, I don't know if you want to have any further comments for that.
spk12: Yeah, I just had one other piece, more of a qualitative approach we took to this. One of the things that we didn't want to do is have any surprises going into next year. And given the nature of the environment we're in, I mean, we're all living in a Fed simulation right now where they've stated that they're going to break the economy for reasons that we know, trying to get inflation under control. And so what I've been doing for my whole career, and one of the things that I've seen a lot is companies convince themselves everything's going to be fine and let's carry costs and let's do the things that we normally would do. And given the nature of our CapEx-oriented business, as Stephen pointed out, and the fact that we see so much opportunity in front of us for synergies in the deal that we can focus on, we thought it was more prudent to assume a more headwind environment make the adjustments accordingly so that we can be really positioned to be able to deliver that double digits even number next year, regardless of the environment. If we end up having a soft landing, then great, that's all the better for us. But if this is a tough road for the next six to nine months, we want to make sure that we're getting in front of it and driving our cost structure to match that. So we decided to jump in front of it and be aggressive.
spk15: Okay, great. One quick follow-up. Part of the longer-term guidance when you announced the edge cash deal is R&D spend was going to decline. It picked up in Q3. Is this sort of a new normal level for this going forward, and what's sort of driving that need for additional R&D?
spk12: No, it's just timing more than anything. I think, you know, you have R&D being spent in areas where, you know, we were adding in security, for example, and then you brought a lot of new R&D people on. And that'll normalize itself out over time.
spk05: Okay, great. All right. Thank you.
spk07: Thank you.
spk12: Yeah, I was going to say one other point. You might recall, we said it was going to take us a couple quarters to really get those costs out of the system. You know, EDUCAST wasn't really run for profitability. So, and we're tracking ahead of plan on that. We're still pretty confident with our ability to do so.
spk03: Thank you. Our next question comes from Michael Elias with Cowan & Company. You may proceed.
spk10: Great. Thanks for taking the questions. You know, first, could you just give us a sense for, one, when this churn event essentially actually took place, and two, as part of that, You know, what your visibility is into future churn, it sounds like based on your comments a few moments ago, you know, it sounds like there might have been some pent-up frustration among that customer base. You know, just what visibility do you have into potential future churn?
spk12: Yeah, I'll take that, and then, Stephen, you jump in. A couple things to keep in mind, Michael, you know, if you think about Edgecast, Edgecast was, A part of Oath was in Verizon. Then they went into BDMS, and they got moved into Yahoo, and then they got carved out. So they've been, for the last two years, been faster on quite a bit. As a result of that, they've been rather distracted. Most of this churn is focused on small accounts. It's nothing big at all. It's just 300 accounts that have gone down a little bit, and they add up to a bigger number. Some of them aren't really churned. Some of them are just using less with us and maybe moving more to other, where they're using multi-CDNs. So I would say that Edgecast probably didn't have a lot of insight into that. They were rather distracted. We do now. We're actually talking to every one of those accounts, getting them back on track. And you might recall in Limelight, we had a similar problem when I joined at the beginning of 2021. And we said it would take us a couple quarters to get that under control. And we did that. By the end of the year, we were growing that base. And I think the same thing happens here as we demonstrated with Limelight. So we're going to run the same playbook, better account coverage, talking to every customer, selling them the story, making sure they understand that You know, they don't need to feel uncertain with all the changes that have gone on with, you know, with EdgeCast, and so we're doing all those things.
spk01: Yeah, and I... Just to add to that, I mean, it's certainly contained within the EdgeCast accounts, and, you know, we're not really seeing any similar same issues within Limelight. You know, it's purely a sort of mid-market... and long tail within the Edgecast accounts. And as I said earlier, the Limelight and Edgecast largest strategic accounts, net dollar retention is very healthy. You know, in terms of your other question, how do we improve the, you know, getting arms around the forecastability and predictability of the business, you know, since I've arrived now two months on the job, I've spent a lot of my time assessing that. That's a key component to my finance organization. And we spent a lot of time in terms of tools, systems, and people to get our arms around it and improving that predictability within the company to better align our go-to-market investments and overall cost structure to optimize and drive our EBITDA. So, you know, we're not perfect yet. There's still more work to be done, but certainly driving sales bottoms up forecast, system revenue generated forecast as well so we can get multiple points to get a better handle on the predictability of the business. All right.
spk10: Thanks for that. And just as a follow-up question, you know, maybe more on the legacy of Limelight side, you know, one of your peers has been talking about declining Internet traffic growth. Just wondering what you're seeing in terms of traffic growth as we think of, you know, year-over-year compares. Anything to call out there? Thanks.
spk12: Yeah, we're not seeing that. In fact, as Stephen mentioned, when you look at our, you know, we track now, one of the metrics we've added that we track is our net revenue retention, and our net traffic retention as well. And when you look at our large accounts, they're all both very healthy and positive above 100. And we also have a pretty good pipeline and having pretty good conversations about adding to that. So I would say from that part of the business, that's running very well, and that's why we think the fundamentals of the business are sound. You know, we've just got to focus on these smaller accounts, and then monitor this macro environment and see how that impacts our CapEx-oriented revenue. And time will tell with that. Thanks.
spk06: Thank you.
spk03: Our next question comes from Eric Martinuzzi with Lake Street. You may proceed.
spk11: Yeah, I just wanted to revisit the downward revision and get to an 80-20 understanding of, is this 80% macro, 20% a bunch of smaller account space that we're poorly treated by edge gas? I don't understand how we're seeing this dramatic step down. And then secondly, I was just wondering, Given the CapEx nature of the ISPs and that part of the guide down, do you have any indication of how long before they're willing to kind of go back to business as usual?
spk01: Yeah. So, you know, as I said, I spent a lot of time since I joined AGO looking at the forecastability of the business. And we really have started to strengthen the processes and build out some of the IT systems to get visibility and a better understanding of directly our business. We've also made some key new hires both in finance and sales operations to drive these new processes. So this is always going to be evolving. We'll continue to make things tighter and tighter. But I feel... Our guidance is reflective of what we know today. There's a little bit of judgment in it to model the impact of sort of holiday season and shipping patterns along with sporting events and software downloads. But I think it's reflected appropriately now in our guide. In terms of the splits between the capital and the overall traffic, it's tough to really give you a quantifiable number. and break that out in any meaningful fashion. And as I say, that's largely because we've probably de-risked it more so on the capital side than we have on the traffic.
spk05: Okay.
spk11: All right. What about gross margin expectations given where the revenue outlook is for Q4?
spk01: Yeah, you know, to summarize Q3, we've made good progress on our gross margins. You saw from our Q3 numbers, we reported 140 basis points up sequentially to 39.8. Going into Q4, you know, we've obviously got a high amount of fixed costs in the business, so a sequential revenue decline will weigh on our gross margins. um so while we work through this uh temporary challenge you know we expect our gross margins q4 to be down roughly between 150 and 200 basis points sequentially um i think it's worth noting that we've got a lot of cost synergies that we're working on and expect them to be kicking in as we go through into 2023 and a lot of those synergies are um are appearing up in the in the gross gross margin line um Things like we've increased with our scale, our renegotiation on our vendors for bandwidth. We have opportunities in colo for reducing our rack space and lowering our rents. And as well as you've heard from our prepared remarks, we see very strong momentum in our software sales that will have favorable mix and a nice lift to our gross margins over time. So, you know, we're uniquely positioned to drive out our costs given these synergies from this edge cost acquisition. And, you know, I think from my side as a CFO coming into the company, it's pretty exciting that joining a company with scale and having multiple levers at my disposal to drive that gross margin up and heat it up at the expansion. But you know, we are going to see a little bit of a headwind in Q4 from this sequentially lower revenue.
spk11: Okay, and then last question, the eight-figure deal, was that a displacement or was that, you know, an internal solution that chose to use EDGEO?
spk12: Yeah, both of those deals that we mentioned, one was the FinTech and the other one was the eight-figure deal. They're both displacements.
spk11: Yeah, congratulations.
spk12: Thank you. Yeah, we've actually been, as Steven pointed out, we've been having very good traction, learning a lot of proof of concepts, and our strategy around using machine learning and analytics to differentiate our security value proposition is really working, so we're pretty excited about that.
spk07: Thank you.
spk03: Our next question comes from Jeff Van Reed with Craig Hallam. You may proceed.
spk13: Great. Okay, several for me. number one, what was limelight revenue in the quarter? And more importantly, what's limelight revenue in the two-quarter guide?
spk01: Yeah, Jeff, this is Stephen again. You know, I'd say it's becoming tougher and tougher to talk about limelight and edgecast business separately. You know, we've moved fast to integrate our sales motions and overall go-to-market efforts. And we've combined and started to combine the networks and rationalization of the products. So those business lines are getting very blurred now as we operate as one company. But ultimately, this is going to allow us combining these companies as quick as we have to achieve even more synergies and efficiency in the long run. But we can't really break it out in an effective manner going forward given how we've structured things and and amalgamated companies.
spk13: Other than the ISP reduction for Q4, have you reduced the base limelight forecast to the extent that you can discern?
spk01: No. You know, I said in the earlier remarks with regards to strategic accounts and large accounts, the net dollar retention overall is pretty strong for Q4. Both HCAF and LimeLight, but LimeLight both in terms of the longer tail and the larger counts is in good shape.
spk13: Okay, so basically you're saying there's no change outside the ISP factor in the guide to what would have been standalone LimeLight forecast for Q4?
spk01: Yes, best as we can see given the blurriness of putting the two companies together. I would say that's a fair assessment.
spk13: What was the estimate internally for the IFC revenue stream in Q4 and what is it?
spk01: Well, as I said earlier in my comments, we pretty much de-risked all of that activity. So it's very nominal. It's non-material for our Q4 numbers. We don't break it out specifically, but I would say it's immaterial for a Q4 number now. No. And what was it prior to the risk?
spk13: Yeah, we don't break it out at that level. Okay. Last question for me. Sales. How do we discern whether or not, I mean, I hear the ISP comments, I hear the comments in general about churn, but the magnitude of it, and the lack of precision about quantifying those sort of leaves it wide open to figure out what's going on here is if I look at sales execution, I haven't heard a lot of talk there. Can you talk about sales and sales execution at this point? Um, you know, what evidence do you have that this is not in fact a, a sales execution, um, process, competitive loss, other related issues?
spk12: Yeah, I'll give you a couple of data points. We, um, Our bookings in Q3 was, I believe, 30% to 40% over Q2, and we plan to be another 30% over in Q4, you know, general numbers. Our pipeline is up 75% from the beginning of the year. This is not including any of the edgecast added pipeline, just organic growth pipeline. Of that, the majority is focused on security and applications, which is up triple digits of that 75%. So, you know, so we're actually seeing the traction on sales and bookings that we expected to see. We've got a number of large deals and proof of concept in the pipeline. I think deals are probably taking a little longer now for obvious reasons. I think people are all trying to decide what they do with their deals. But generally, we're tracking with bookings and sales and we'd be expecting to and feel pretty good about that.
spk04: Okay. I'll leave it there. Thank you.
spk07: Thank you. The next question comes from James Breen with William Blair.
spk03: Your line is open.
spk02: Thanks. Can you talk about on the revenue side your customer concentration amongst your larger customers and how that may have changed quarter to quarter with edgecasts in there and the growth that you're seeing in the top 20 customer base that you've often referred to? And then just secondly on the cost side, As you're seeing the revenue step down in the fourth quarter, is there a way to accelerate cost reduction to help the margins stabilize going forward based on what you think synergies will be over the next couple of quarters? Thanks.
spk01: Let me take some of those and then Bob can weigh in toward the end. Customer concentration, I mean, we said before, one of the many benefits of this acquisition was lower concentration in our large accounts, which historically was, I think, nearer the high 70s. And so that's come down now to the lower 70s overall percent, which is in line with what we were expecting. In terms of how do we offset some of this decline in in improving EBITDA. I think I touched on some of these. We've got a tremendous amount of cost synergies that we've only just started to scratch the surface on. We've already spoken and upped the number to about $60 million, and a large portion of that is going to materialize into 2023. So we do sense that we're quite uniquely positioned, even in a tougher revenue environment, that we can help drive not only our gross margins, but our overall EBITDA leverage into 2023?
spk02: From a customer concentration point, I guess I'm a little confused because if you were at the high 70s before and you basically doubled the size of the company, shouldn't the customer concentration of those large customers be significantly lower than where it was pre-deal close?
spk01: Well, those customers we acquired were also larger customers of similar sizes.
spk06: Thank you.
spk03: Our next question comes from Rudy Kessinger with BA Davidson. Please proceed.
spk14: Thanks for taking my question. So on the churn, I mean, You're saying it's customers who maybe weren't treated the best and the changing of hands of Edgecast. But, I mean, how much of the churn is really just customers who had five CDNs previously and then they had four CDNs once the deal closed and they wanted to go back to having five CDNs. And so they took some of the traffic away from you guys and spread it back out. to another CDN. How much of that was the cause for the churn as opposed to customers just reducing traffic or leaving because they were uncertain of the future of the business or just being treated poorly?
spk12: Yeah, I think it's probably, there's a little bit of a lot of that in there. If you have multiple CDNs, if you're uncertain or you haven't talked to anybody and you're wondering where the new company's going, you're going to just move traffic somewhere else. Most of those customers we talked about, there's no large numbers in there. Um, you know, they're just like death by thousand paper cuts kind of thing. And, um, uh, and, and they're still doing stuff with us or just doing less with us. And so, you know, we're going to count by account and understanding each one, understanding if it's a scenario where, you know, they might be using multiple CDNs and we can get that back, uh, or they've actually moved to another CDN. In some cases they're doing it because they get better rates. If they consolidate some of their traffic on one of the hyperscalers where they're not meeting their minimums for other things. So there's those kinds of factors that are playing in as well. So there's really a number of different things, but it's essentially them making a tactical choice to move traffic to a place where they feel like it's in the best interest. And we just weren't having enough of those conversations previously enough to get in front of those.
spk14: Okay. And then if I just take a step back, like if I look at last year at the X, the layer zero revenue, You did 213 million of rep for the year versus the initial guide midpoint of 225 million. This year, you're guiding a 365 now versus the prior midpoint of 385. So you're taking numbers down substantially. I would assume the preliminary outlook for 23 that you gave last quarter is completely out the window at this point. And so what would you say? I mean, why should investors place any degree of confidence in future guidance that you give? And how do we get comfort knowing that your visibility is of the business going forward is in any improved position relative to six or 12 months ago.
spk12: Yeah, I think there's a couple things, and Steve, feel free to weigh in, but I think, you know, look, anytime you acquire a company that's the same size or larger size than us, it was a carve-out of a carve-out, it didn't have, you know, finance department and those things, there's going to be some visibility challenges, and we've been trying to be transparent about that. We're working through those. As Steven pointed out, the best way to do it is to put all the apparatus in place that we need to do. It's why we want to spend the time and come out in February with guidance with very substantial models behind that and details behind what that is. But up to this point, to a large degree, we've been relying on information that we get from people that didn't work for us and we did the best we could with it. That's the nature of doing these kind of turnarounds and these transformations.
spk01: Yeah, and I think to add to that, I mean, part of, as I say, my focus on joining the company, obviously there's been a lot going on with this acquisition in just a few months, but this is the first full quarter that we've consolidated this acquisition. So we know a lot more now than we did three months ago. And then coupled with that, we have been investing both in people, processes, and systems to to get our arms around in a better fashion that forecastability and predictability of the business. So when we do guide in our Q4 results for 2023, we're going to be a lot better equipped and a lot more confidence behind that to give a clear line of sight on what 2023 looks like.
spk06: Thank you.
spk03: Looks like our next question is from Mike Latimore with Northwind Capital. You may proceed.
spk08: Hi, this is Aditya on behalf of Mike Latimore. Could you give some color on what level of operating cash flow you might see in 4Q? Do you expect a positive free cash flow in 4Q?
spk01: No, I think, you know, the EBITDA number is sort of a good indication of whether we landed on cash flow. I mean, certainly you can see that as a result of putting these two networks together, we have substantially reduced our capex and that will be, we expect that to be continuing into 2023. The company is historically operated around a 10% type capex model and we think we're going to be somewhere in the realms of five to ten as we look into next year, but Yeah, I think the EBITDA is a good indication for the for the overall operating cash flow All right, could you give some color on the current CDN pricing environment compared to how it was earlier in the year?
spk12: Yeah, we're not seeing much in the way of anything outside of what we anticipated for pricing. Um, I think, um, you know, it's largely been consistent with what we anticipated in our plan. As we talked about with limelight, we're performing where we expected to perform. And, uh, and that's true on the pricing front as well. So, and we continue to have good performance. And so all the things that we were challenged with last year, we cleaned up and now we've got to focus that, that same effort on, uh, cleaning up edge casting and turning that into the great, you know, the same situation we did with limelight. But, um, We're not seeing any headwinds there outside of what we normally expect in the industry.
spk05: Thank you.
spk07: Thank you.
spk03: It looks like there are no further questions in the queue. So as a quick reminder, it is one on your telephone keypad if you would like to ask a question. With no further questions at this time, I will pass it back over to the management team for any closing remarks.
spk12: Thank you, Operator. We look forward to sharing our progress and continuing our conversations with analysts and investors. We will be participating in three conferences this quarter, the Needham Security Networking and Communication Conference on November 15th, the Craig Allen Alpha Select Conference on November 17th, and the Raymond James Technology Investors Conference on December 6th. Thank you, everyone, for joining us today.
spk07: This concludes the Egeo third quarter 2022 financial results conference call. Thank you for your participation. You may now disconnect your line.
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