Edgio, Inc.

Good day, ladies and gentlemen. Welcome to the FGO 2022 Fourth 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,

Good afternoon.

Thank you for joining the Edge Year Fourth Quarter 2022 Financial Results Conference Call. This call is being recorded today, July 19, 2023, and will be archived on our website for approximately 10 days. A copy of our Form 10-K for the Fiscal Year 22, filed on June 29, 2023, along with today's press release, can be found in the IR section of our website. We have also provided a trending schedule of our Restated Historical Financial Statements on the site. Please note that today's comments include forward-looking statements regarding future events and financial performance, including statements regarding guidance for the 2023 fiscal year. These forward-looking statements are subject to risks and uncertainties and involve a number of factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. The factors include any impact from macroeconomic trends, the integration of any acquisitions, and any impact from geopolitical developments. Please see the forward-looking statement disclaimer on our company's earnings press release issued after the close of market today, as well as the sections entitled risk factors included in EDGEU's filings with the SEC, including an annual report on Form 10-K and quarterly reports on Form 10-Q. Undue reliance should not be placed on forward-looking statements which speak only as of the date they are made. NGO disclaims any obligation to update these statements to reflect new information, future events, or circumstances, except as required by law. During the course of today's call, we will be referring to certain non-GAAP financial measures. The GAAP financial measure most directly comparable to each non-GAAP financial measure used or discussed and a reconciliation of our differences between such measures are provided in the earnings at least in our IR section of our website. These non-GAAP financial measures are not intended to be substitute for our GAAP financial results. I'll now turn the call over to Bob. Bob, the floor is yours.

Thank you, Sumit. Good afternoon and welcome to our earnings call for the fourth quarter in fiscal year 2022, which includes our restated financials. I have three important topics that I would like to discuss today. First, the restatement has been completed. The scale and scope was in line with our initial expectations and was the result of a revised accounting treatment associated with adding capacity to partners, a practice dating back to 2016. We have adjusted our go-forward accounting practices for this small part of our business, representing less than 6% of pro forma total revenue, to be in line with the auditor's recommendation. This will result in a 100 to 150 basis points improvement to gross margins in 2022 and improved margins going forward. Our board engaged a third party to review all matters surrounding this restatement and concluded there were no issues beyond the adjustment of accounting treatment. I want to personally thank the investment community and our employees for their patience and understanding throughout this process. I also want to thank our new finance accounting and legal teams who work tirelessly day and night throughout this process to bring it to a proper conclusion. Second, we continue to make notable progress with our company transformation. Back in early 2021, When I joined the company, we committed to investors that we would fundamentally transform the composition of the company away from its sole dependence upon commoditized large-file content delivery to becoming a comprehensive edge solutions company. Our historical financials, most notably in late 2020 and early 2021, made it clear that our then singular focus on CDN delivery was not a value-creating business strategy. I will unpack this progress in more detail in a moment, but let me share a few highlights of our progress. This year, we will have achieved run rate savings of between $85 and $90 million, building on the $50 million of savings we achieved last year. We expect to continue improving our unit economics, reducing asset intensity, and improving our operating efficiency well into 2024. We have built a strong foundation for growth with the implementation of robust demand generation capabilities, by expanding our routes to market with the addition of new large channel partners, and by adding strength to our revenue team, including a new chief revenue officer, Chief Marketing Officer, and Media Business Leader. Our pipeline for applications has expanded by almost 80% since the beginning of this year, with our average deal size up by more than 60%. Bookings for our application solutions improved by 100% sequentially in the second quarter, supported both by new client wins and existing client expansion. We have improved our revenue quality with approximately half of our revenue now associated with new products that have a higher margin and a recurring revenue profile. We have extended our solutions beyond commoditized CDN to include becoming an award-winning security solutions company, defying the skepticism of that objective being achievable. Moving our media capabilities upstack with one of the industry's most complete media orchestration and workflow solutions, Uplink delivers more than 220 million ad hours per year and fully manages more than 40,000 live sporting events annually. The launch of our applications version 7 suite has proven to power unmatched speed, security, and productivity to power better business outcomes for clients with high-stakes web applications where monetization, experience, and cost are meaningful to their bottom line. Third, this year we will prioritize EBITDA improvement and take a more conservative view of top line growth. The progress with our transformation has supported a growing and higher quality pipeline, marquee wins, and a number of other positive indicators that confirm we are on the right path. Despite that, The natural uncertainty associated with restatement has elongated our booking cycle during this period. Additionally, we have seen softness across the media sector as large media streamers take steps to aggressively pursue profitability improvement. We also have a couple of notable retail banking clients that were directly impacted by the recent banking crisis. We believe that our recent 10-K filing, along with our first quarter 2023 and second quarter 2023 10-Qs, will address the uncertainty. Our recent progress in reducing churn with the acquired edgecast business, growing pipeline, strengthened growth capabilities, and new products provide a strong foundation for profitable growth in 2024. These factors, however, have resulted in a more conservative outlook for 2023. Now let me expand upon my second point, the notable progress against our strategic transformation objectives. In the second quarter, we made a number of key improvements to our commercial teams and practices. Todd Hinders, joined us from AWS Elemental as our chief revenue officer. We completed the implementation of a powerful CRM system, enhanced training protocols, and we continue to invest in growth enablement across a number of other processes. We have added a channel program and currently work with more than 50 partners, including Microsoft Azure, Verizon, and our newest partner, AWS. Our combined solutions further enhance the value we can deliver to our clients. In the last couple of quarters, our channel partners have helped us win clients such as a gaming company in South Korea, a document management company in Germany, a telecom company in the Middle East, and a domestic digital e-commerce company. These deals range from six to seven figures in annual contract value. The culmination of these investments are beginning to demonstrate the synergistic value of our newly extended product portfolio. In the last few months, we have seen an international sports federation and a large streaming company, both media clients using Uplink and delivery respectively, choose us for their security needs as well. We are especially excited about our recently announced advanced bot management solution, where we are seeing double-digit attach rates for trials with our existing client base. In fact, a prominent football club in Europe and a large semiconductor company have become paying clients. Clients have also begun deploying our newest API security product that we expect to formally announce later this month. As a result of these product innovations, upsells in both applications and media grew by more than 200% sequentially. We continue to innovate around security and are excited about our prospects given our early success with advanced bot management. Continuing to build on our portfolio synergies, our application solutions now consist of our security, performance, and site solutions. With the launch of award-winning products like applications version 7 and our advanced bot management, We now uniquely power sub-second websites with integrated multi-layer security, all from one holistic platform. With this platform, Egeo delivers page loads 90% faster than our competitors, blocks billions of malicious requests, and decreases the time it takes to mitigate exploits by over 85%. Additionally, our suite of products are all managed through a unified console, eliminating the excess operational costs created by tool sprawl. In short, our unique capabilities enable Egeo to deliver industry-leading monetization, operational efficiency, and user experience to our clients for their high-stakes digital properties. Recently, we completed competitor takeout wins with a premium automobile manufacturer in Germany, a global sporting e-commerce platform who chose our security solution to secure their industry-leading ticketing system, a $100 billion fast fashion brand in China, and a major football league in Europe. Domestically, we displaced a large competitor at Mattress Firm who utilizes our holistic performance and security solutions to improve their business outcomes. Tapestry, with its world-class brands, Coach, Kate Spade, and Stuart Weissman, continues to expand its business on our platform with additional brands added during the quarter. Mars Brands recently hired Egeo to modernize its M&M and Wrigley web architecture and to improve page loads and conversion rates. We are proving that our unified performance, security, and developer productivity strategy powers unmatched business outcomes for our clients. In addition to these exciting client wins, industry experts and analysts are also recognizing our strong product offerings. In recent months, we have been primarily featured in research reports by IDC, GigaOM, and Frost & Sullivan. Our security solution racked up two high-profile awards. We received the Frost & Sullivan Client Value Award for Holistic Web Protection, as well as the Cyber Defense Hot Company Award at the RSA Conference. Clear indications that we are delivering upon our commitment to establish Egeo as a credible security vendor. Uplink, recognized as best in show at the recent National Association of Broadcasters, or NAV Conference, is the cornerstone of our media strategy. Uplink delivers a differentiated set of seamlessly integrated advanced capabilities, that can enable premium content owners to improve monetization and experience with less cost. Uplinks drag and drop simplicity and out-of-the-box integration with key ecosystem platforms such as Google Ad Manager uniquely positions it as a true end-to-end OBP streaming solution. In March, Eric Black joined our leadership team to lead this business. Eric spent more than 20 years at NBCUniversal and holds nine Emmy Awards for his prodigious work as a pioneer in the streaming industry. Eric and our growing ecosystem of partners will continue improving our ability to provide the industry with the platform of choice for media companies to do more with less. In April, we announced a partnership with the Canadian Hockey League. The CHL is using Uplink to manage and organize live and on-demand streams for the 60-plus teams playing across three leagues. Uplink helped CHL streamline workflows, boost performance, and spin up resources to help with live event production and scale teams for more than 2,200 games. Uplink together with our expert services teams, helps CHL create the experience their fans desire, better monetize their ads, and reduce their operating costs. In summary, our continued near-term prioritization of improving profitability, a meaningful improved portfolio of integrated products, growing industry recognition, and strengthened growth team positions us well for EBIT expansion through this year, followed by high-margin revenue growth in 2024. Now I will turn the call over to Stephen to discuss

Q4 2022 results.

Thank you, Bob. Before we discuss the financial results, I want to spend some time going over the details of the restatement and the changes in related accounting when adding capacity partners. On March 13th, 2023, we announced that Egeo will restate its previously issued financial statements related to the revenue recognition of our practice while we add capacity through partners. As a reminder, This constituted less than 6% of revenue on a consolidated pro forma basis for the nine months ended September 30th, 2022. As previously communicated, the changes being recorded did not result from a change in published accounting guidance during the relevant time period or any overrides of controls or misconduct. Since that day, we've been working with our auditors to conclude this process. With the filing of the 10K, we have completed the restatement and we expect to file the 10Q for the first quarter in August and for the second quarter of 2023 shortly thereafter. Now let me take you through the changes. Further new accounting treatment, all transactions will now be treated as financial leases. Previously, revenue from the sale of this solution was recognized as a one-time sale with some ongoing revenue share components. Now, The equipment sold to the ISP partner will be treated as a financial lease as opposed to an equipment sale. As a result, we will have a financing obligation with an associated financial receivable. We will not be recognizing revenue from this sale on our income statement. Now let me talk about the treatment of CapEx. The equipment we purchase for the ISPs is recorded as CapEx. When a pop is activated, we will record the marked-up payment from the ISPs on the cash flow statement as financing activities. In essence, this payment is an offset to CapEx, and we've provided the reconciliation in the trending schedule in the investor relations section of our website. Per the new accounting, a portion of the ongoing revenue share will go against the financing obligations instead of being expensed. which should improve gross margins between 100 to 150 basis points. I would reiterate that nothing is changing from a commercial perspective or in how we collect cash from ISPs and clients. This is simply recategorizing how these transactions are recognized in our financial statements. Now moving to our financial performance in the fourth quarter of 2022. Revenues for the fourth quarter 2022 were $108.8 million, up 90% from the fourth quarter of 2021, due to the inclusion of the edge cost acquisition. We saw a sequential decline of 1.8%, driven by the previously communicated churn. As Bob mentioned earlier, we took immediate actions and have seen a reduction of churn in the first half of 2023. Moving to gross margin, cash gross margin, which excludes the impact from stock-based compensation, acquisition-related expenses, and depreciation, expanded to 42.3%, up 110 basis points quarter over quarter. Despite lower sequential revenue, cash grows margin benefited from seasonal growth in traffic, as well as solid execution on our cost synergy plan. Turning to operating expenses, Cash operating expenses excluding stock-based compensation, restructuring charges, acquisition and legal-related expenses, depreciation and amortization were $56.1 million or 51.6% of revenue, up from $51.4 million or 46.4% in the third quarter of 2022, as our cost containment plans did not go into effect until later in the quarter. R&D decreased by $1.2 million sequentially to $23.7 million, approximately 21.8% of revenue, from $24.9 million, or 22.5% of revenue, due to the savings from previously announced cost containment efforts. Sales and marketing expenses increased $1.8 million sequentially to $15.2 million, or 14% of revenues from $13.4 million, or 12.1% of revenues due to seasonality in discretionary marketing expenses. G&A expenses increased by $4.1 million sequentially to $17.2 million, or 15.8% of revenue from $13 million, or 11.8% of revenue as we invested in our G&A function to scale from the Edgecraft acquisition and due to some one-time expenses that were operational in nature. Share-based compensation included in COGS and operating expenses was $7.9 million, slightly below the third quarter at $8.4 million. Restructuring charges were $10.9 million compared to $4.1 million for the third quarter of 2022. Acquisition and legal-related charges included in COGS and operating expenses in connection with the EDGCAR transaction were approximately $6.2 million compared to $11.3 million for the third quarter of 2022. Adjusted EBITDA for the fourth quarter of 2022 was a loss of $10.1 million compared to a loss of $5.7 million in the third quarter of 2022, due to higher SG&A expenses, as discussed earlier. Moving to the balance sheet and cash flow, cash and cash equivalents and marketable securities totaled $74 million, an increase of $3.3 million from the third quarter of 2022. We've been very disciplined about our cash management and increased our cash balance with efficient working capital management and lower capex. Capital expenditure, Net of payments from ISPs during the quarter was $4.1 million, or 4% of revenue. Over the last six months, we've initiated tighter CapEx spending controls, which has resulted in CapEx significantly low historical levels. DSO in the fourth quarter was 72 days, 13 days lower than the third quarter, as we accelerated our efforts integrating edge-cast customers and streamlining the collections process. Now, moving to guidance. As Bob mentioned, we have experienced elongated sales cycles given the restatement, a more challenging macro environment, and our desire to improve our unit economics. Based on factors we've discussed, our outlook for 2023 is as follows. Revenue range of between $392 to $398 million, which implies a growth of 16% to 18%. Further restatement, we will not be recognizing between $20 to $25 million in open-edge revenue. Adjusted EBITDA range of between negative $37 million to negative $31 million. And capital expenditure in the range of $10 to $13 million. This implies business capex as a percent of revenue of about 3 to 3.5%. We expect payment from ISPs of between $5 to $10 million. Now let me provide more context around the guidance. Based on seasonality, we expect mid to high single-digit sequential decline in the first quarter of 2023, with a further decrease in the second quarter due to seasonal over-the-top viewership decline in several months and the headwinds we've discussed. We expect to see normal increased seasonality in the fourth quarter. This cadence is based on the trajectory we saw in the first half of the year with some benefits from the operational improvements as Bob has highlighted. We expect cash gross margin to decline in the first half of 2023 from the fourth quarter due to the seasonal revenue decline consistent with having a high fixed cost structure. We expect second quarter 2023 adjusted EBITDA loss to be the bottom for the year with reduced losses in the third quarter and breakeven in the fourth quarter. Our cash balance at the end of the second quarter was approximately $35 million as we paid down several accrued expenses from the EDGECAST acquisition and incurred expenses related to the restatement and other restructuring expenses. We expect our cash needs in the second half of 2023 to be significantly lower than the first half due to benefits from cost-saving actions, lower capex, and reduction of the transition service agreement from the EDGECAST acquisition. We are comfortable with our cash balance, and we remain undrawn on our line of credit. In summary, I want to reiterate our key financial priorities. We remain laser-focused on stabilizing our revenue in 2023, and we expect to return to revenue growth in 2024 due to our churn reduction efforts, the new go-to-market initiatives, new products, and by leveraging our channel and direct sales team. We are right-sizing our cost structure to align with revenue assumptions, which will allow us to break even with modest revenue growth. We will continue to accelerate our cost-saving initiatives as we go through the rest of this year and next. Our main areas of focus are to continue to improve the unit economics through managing client profitability and driving efficiency in our operating model. We executed on run rate cost savings of approximately $50 million by year-end 2022 and now expect to be at $85 to $90 million by year-end 2023. The combination of expected revenue growth and cost savings initiatives should result in 2024 being a year of profitable growth. With that, I'll turn the call back to Bob for some closing remarks. Bob?

Thank you, Stephen. So to conclude, I would remind everyone that the path of transition and transformation of Egeo into a fully integrated edge solutions company from that of a low-margin commodity CDN provider has not been a straight line, and in fact, turnarounds rarely are. We are nonetheless successfully repositioning the company to better participate in the growing demand for performance-enhancing software that is seamlessly integrated with enterprise-class security and powered by our globally scaled world-class edge network. We believe many of the recent industry awards for products that did not exist merely two years ago reaffirms that we are headed in the right direction. We cannot control the macroeconomic challenges, and we have had a few unforeseeable hurdles of our own to overcome. We have begun to stem the churn identified with the acquisition of Edgecast acquired last year and are seeing improvements in many leading indicators of the business. Our focus on improving profitability, expanded revenue initiatives, and by extending new products that support more diversified revenue puts us on a proper trajectory for profitability improvement this year. We will build on that foundation with profitable revenue growth next year. With the headwinds addressed, the disruptive restatement behind us, We believe we have the building blocks in place to continue our transition from a commodity-based business to a higher-margin edge solutions company with far less capital intensity. As we continue to integrate edgecast and drive costs lower, we believe investors will ultimately begin to witness the full effect of the product mix shift that has already taken place. In closing, we thank our investors for their patience and continued support and look forward to continuing our work on building what we believe to be uniquely possible for us,

With that, operator, please open up the lines for the question and answer session. The floor is now open for your questions.

To ask a question this time, please press star 1 on your telephone keypad. If at any point you'd like to withdraw from the queue, please press star 1 again. You'll be provided the opportunity to ask one question and one further follow-up question.

We'll now take a moment to compile our roster. Our first question comes from the line of Michael Elias from TD Callen.

Please go ahead.

Great. Thanks for taking the question, guys. Just to start off on the revenue guidance, you know, we're seeing the revenue step down this year. Since you did the edge cast acquisition and it closed, could you give us some kind of bounding metrics to think about, you know, how the revenue from edge cast has essentially evolved, i.e., is there any proxy for churn that you could provide us just so we can get a sense of, what's going on there. And then the second question for you would be, just as we think about the professional services fees related to the restructuring, is there any kind of color and guidance you can give us there as we think about our models? Thanks.

Yeah, Michael, I'll take the second one first, and then we can sort of circle back and talk about the edge cash revenues. With regards to the restatement, obviously a lot of work's gone in, not just internally, but we've used a fair extent of outside consultants and additional auditors. So a lot of work's been done. We're going to incur most of those charges in the first half of this year. And I think you could assume roughly sort of mid-single digits in terms of restatement costs. With regards to the Edgecast revenues, you know, it's a bit tricky to sort of isolate things between Edgecast and Linelight because we are running as a unified company now. We have spoken at our last learning school back in Q3 about the churn, and I'm happy to say we've made really good progress there. We began our efforts to outreach to a lot of the largely neglected clients that we took over from the acquisition to understand their their needs and introduce the Egeo solution. We dedicated resources and senior leadership teams in place now with campaigns specifically targeted at these clients, and we're seeing substantial improvements there. In fact, the overall logo churn is down by approximately 40% from the rate at Q4 of last year. We've obviously improved the performance of the network as well that's also helping lower that churn. And then with the introduction of a lot of good product offerings like V7 and advanced bot management is also really allowing those customers to understand the value of Egeo. Bob, I don't know if you've got anything else to add.

No, I think that's great. I think the only thing I'd add, Stephen, is some of the things that we talked about and how we were going to get in front of that churn is we, first of all, had to engage customers, and we've done that. We've built the client success team that we talked about, and they're doing a phenomenal job. And then, secondly, we've also done a great job of really going through and understanding the real root causes from a product standpoint. So we identified somewhere between 20 and 30 key features that were missing and And we put those in place. There's a couple more that we'll do in the next quarter, but largely they're there. So we don't have any meaningful gaps in the product anymore. And, you know, the R&D team has done a great job of doing that. That was all covered largely in application version seven. And so when you look at it from a churn standpoint, we think about this in terms of where do we need to be to be at parity with a well-run company in market. And we think we'll probably be approaching those numbers as we exit the year. And as we go into next year, as bookings takes off and churn is in normal ranges, as you'd expect from a SaaS company, that's why we kind of think that 2024 is where we should start to see some of the benefits of all this. But it is going as we hoped it would, and we're making good progress there.

Got it. Thanks. If I could actually just squeeze one more in. You know, is there anything we should keep in mind in terms of upcoming renewals for this year, i.e., do you have some larger customers coming up for renewal that we should just have on our radar?

No. What I would say, Michael, is we have those all the time. And, you know, as we've talked about before, we are very proactive in those conversations, and we have active conversations with all of them. So we don't really see – we don't anticipate any issues. I'll also tell you, you know, the nice thing about Todd, first of all, he's super customer-obsessed. He's already spoken to most of our large customers in person, traveled all over the world to do that, and already knew them from his previous job. So I would say if there's any highlight in those conversations, it's that they really like where we're going. They like the products. And for the first time, we're starting to have customers who have been traditional CDN customers say, hey, maybe we should do some of your applications and security stuff. And we're seeing progress there. So. It's going really well. It's been a lot of work to get that in place, getting the customer success team in place, getting the product there, and being able to do that cross-sell. But we're starting to see early signs of that progress.

Great.

And by the way, when you – yeah, sorry, by the way, one other piece. When you have these other products, it's a much easier conversation to have on your CDN business because you can bundle things together and say, look, I need you to not be so aggressive on price, but we'll do these things for you. And so, you know, we have more levers to pull, which is definitely working as well.

Understood. Thanks, Scott. Thank you. Our next question comes from the line of Eric Martinuzzi from Lake Street.

Please go ahead.

Yeah, given the time that's passed, you know, just over the past 12 months, just curious to know what's the current revenue mix amongst the three product offerings? So the content delivery being number one, app security number two, and then uplink number three.

the mix implied in the 2023 guide.

Yeah, Eric, this is Steven. We haven't actually, to my knowledge, historically broken it out, but let me sort of directionally give you some content so you can sort of feel models. You know, the overall delivery piece is approximately around 50%, and then what we think is the stickier, higher margin delivery business with high growth, which is Uplink and the apps, really is making up the other 50%. And that's the sort of mix that we're assuming in the model for 2023. I think as we look out to 2024, we do expect a high trajectory of growth from Uplink and apps, just the nature of those markets and those opportunities. But so we do expect that to be a larger portion of the business as we look out into subsequent years.

Got it. Congrats on getting the 2022 restatement done. I look forward to the Q1 and Q2 results.

Thanks, Eric. Our next question comes from a line of Frank Luthan from Raymond James.

Please go ahead.

Great. Thank you. So, you know, as far as sort of the revenue slowdown here, I mean, can you just characterize this a bit? I mean, is it Is this more of a sales performance issue or network issue, or is this some bleed from edge cast? And can you give us a little bit more color on sort of what is related to concern about the restatement versus the economy here, just to have a better sense of kind of where we are in the process of turning the revenue back around?

Yeah, Frank, I'll take that one. This is Stephen, and then Bob can add to it if you like. I think that the revenue outlook for 2023 is sort of really driven by sort of three key areas. One, and we mentioned this in the prepared remarks, certainly we're seeing an elongated sales cycle, and I think part of that is Just the natural macro environment where customers are sort of forced to thought as to whether they should be taking on new projects given their resources and their focus on cost. And then secondarily, I think it's natural that there's some uncertainty that comes about from a restatement like this. And I think now we've got that behind us. We're starting to certainly see some encouraging green shoots with a growing pipeline and some pretty solid bookings. But that's factored into that guidance. Additionally, while I commented earlier about the churn, we've substantially slowed that rate. But that's something that's created a bit of headwind as we've gone into certainly the first half of 2023. And then additionally, now no longer we have zero revenue associated with our capacity partners as in the open edge. So that's the ingredients. I think that's the drivers. We certainly feel as we come towards the end of this year that we'll see the seasonal uptick in revenue and it'll position us very well for 2024.

Yeah. And then, Frank, let me add to that.

Sorry, go ahead. Yeah, go ahead.

No, go ahead.

Okay. Yeah, I was going to add to that how we think about sales productivity going forward. So we – look, there are a number of factors that Stephen pointed out that we try to navigate. But the reality is we also – needed to see more productivity out of our sales organization. When you think about what we've done over the last year, you know, we used to have one product and essentially selling a kind of one-trick pony, and now we're trying to sell a portfolio and we're selling solutions and value. It's a very different kind of sale, and some of the reasons that we made the changes that we did. We've actually made a number of investments beyond the personnel, but also we've implemented a very robust ERM solution, a bunch of land perform and expand processes, a brand-new, you know, demand gen set of capabilities with marketing, and we actually have a revenue war room pretty frequently we just had one this morning as a matter of fact and we look at the KPIs we look at the pipeline we look at our conversion of that pipeline we look at how that's growing and when you look at all those numbers and those friends you see a couple of interesting things so for example we're now starting to see the pipeline grow and the quality of that pipeline grow at the same time which is positive our conversion rate is lower than where it needs to be Todd's doing a great job of not only bringing in people that are really good at that, but also training the people that we have. We fully expect, you know, we have a benchmark to get to a certain conversion rate by the year end, which would put us slightly shy of where industry benchmarks would be. And as we go into 2024 Q1, we should get to that point. And so we track that on a monthly basis and we're seeing the trends that we want you to get there. So when you combine the fact that we're generating more pipeline, we actually now have a channel that's also very productive. Our marketing is doing a great job doing demand gen. we're improving those sales motions, and churn is moving in the right direction. All that should come together and set up for a nice 2024, but we wanted to be very thoughtful. There's a lot of work to do to do all that, so we want to be very thoughtful for this year.

Okay, great. And then on the churn, maybe if you mentioned this, I missed it, but is it more broad-based or is it concentrated in some large names? And you've won back churn in the past. What are your thoughts on winning that back, or is this business you've you don't want back if, you know, given the pricing.

Yeah, I think it's a, there's, let me maybe bucket it in a couple of areas and Steven, feel free to jump in. I think I put it in three buckets. We talked about previously that there was a bunch of small cats and dogs accounts and that, that stuff is really stemmed and we're doing a good job there. We did have some price compression. Anytime you ask people to go to new paper and new contracts from an acquisition, it's always an opportunity to renegotiate. So there's some of that. And then, quite frankly, we also found as we dug into it more that we had situations where they were more one-time in nature. They had a big revenue pop, and it really wasn't ARR. It was, you know, just one-time revenue. We've got to call that churn because you've got to put it somewhere. But, in fact, it really wasn't, you know, negative churn. So I would say there's a bit, maybe a third that's a reset with bringing two companies together, you know, maybe a third-ish that is associated with real churn, and that's improving. And then, like I said, some of it is just categorization stuff that you just got to clean up and deal with.

Yeah, I think you've covered it well, Bob. The only other thing I would add is in some areas, and we touched on this in our prepared remarks, there is, in some cases, intentional churn, where we're very focused on improving the profitability and EBITDA for the company, and we're just not going to accept a negative margin business. So So there was some intended consequences there relating to that, and obviously that's been built into our forecast. But hopefully that's going to result in approved EBITDA as we look forward.

Yeah.

And one other thing I'd mention, Frank, because we've talked about this previously, is the level of transparency that we have around this now is really unprecedented from where we were before. I mean, we've talked to every customer. We have ongoing engaged conversations. We know what they need. We're working with them proactively in a partnership manner. And we've got a really good analysis about what the real root causes are, what specific features in the product are going to, you know, address certain churn risks and, you know, all those things. So, you know, we feel, again, we're running it more like a science initiative than an art initiative.

All right, great. Thank you very much.

Thanks, Frank.

Our final question comes from the line of Jeff Van Rie from Craig Hallam. Please go ahead.

Great. Thanks for taking the question. So I've got a couple. I guess just on the pricing in particular, just to be clear, is the pricing in the market getting more difficult or are you getting more sensitive? Can you put weightings on the two?

Yeah, I would say that the pricing is not getting more difficult. It is what it's always been. If anything, there's probably opportunity for it to not be as aggressive as it has been historically. In particular, we have more to offer now too, which helps. I think what we're seeing in the market is a couple of things that have happened, particularly in the traditional legacy media CDN Number one, you know, you read the news, you know that a lot of these streamers are trying to figure out a way to make it profitable in pretty aggressive ways. And the ways they can do that, sometimes they can squeeze price, but they can also cut their bit rates so that they're streaming at lower quality. People don't see that and you don't talk about it, but that means less traffic for us. So we're seeing that kind of thing happen. You might also consolidate. Instead of having five providers, you might consolidate down to two and ask them to give you very aggressive and low rates. And so we've seen a little bit of both of those things. I think it's more temporal in nature. I think the market's just readjusting. But that's really what we're seeing as far as pressure. We're not seeing any unnatural pressure beyond those things, which are ways that people can manage in the near term to prove their profitability.

Okay, that's helpful. And then on the products, maybe a little more emphasis on this call, I think, than the prior when you were still getting your hands around the churn and what was going on in the base. I think generally the explanation previously was there was just some lack of customer care, really, no reaching out, no relationship. So when you got in there and you reached out, they were gone or not interested at that point. But I heard more emphasis tonight on the product. Did you find out from your outreach to customers that, in fact, the product had fallen off pace more than you realized or expected?

Yeah, I wouldn't say more than we realized. The question really was where. I mean, these products are – particularly security. They're very complicated. They have a number of features. And there are things, if I try to talk to you about it, your eyes are rolling back your head. But they're important to a CISO. So what we did is we recognized we had to get in front of it. We brought in the client success team. I talked about that. I was able to bring in a team from my past that has done this before in security, and they hit the ground running. The first thing we did in the first 30, 60, 90 days was talk to every customer, find out where the risks were, find out what the real issues were. And in that, you find a few different things. You find that they were just glad to talk to somebody, and sometimes that was enough. In other cases, they would say, hey, we need this feature. Your competitors have it. And as much as we don't want to change, if you don't get it, it's important. Think of something like encryption, which is pretty important. And so we quickly built that list of about 20 to 30 things. prioritized our R&D, and Ajay and the team did a great job of really getting those done and did that big release with App 7, which really addressed the majority of those things. And so I would say it was a combination of some feature gaps that we've addressed. We have a very clear site to that now. And then just some basic caring and feeding. And, you know, quite frankly, too, just uncertainty. You know, customers want to know. We don't know who EDU is. You know, we came to Verizon, and we want to understand this and The good news is when we have conversations with them and they understand what a product can do and the story, you see the light bulb go off and they get pretty excited about it.

Okay, that's helpful. And then, Stephen, just last one. I guess it'll be a little more self-evident once I get into the modeling after the call here, but with respect to the cash balance, can you give us a sense of what the implied details you've given us tonight suggest about where cash bottoms are?

Yeah, sure. So, you know, I mentioned on the prepared remarks our cash balance, XC and Q2 will be about $35 million. You know, just to give you a little bit of context there, you know, we've paid down a lot of the accrued expenses associated with the Edgecraft acquisition, and we've had to work through all those transition services agreements that we had from Yahoo, which, by the way, ended on June 15th. Additionally, we've incurred expenses related to, I believe at one time in nature, the restatement and some of the other restructuring initiatives that we acted on, which certainly impacted cash. So I think, you know, as we look to the second half of this year with a sort of improving seasonal uptick and our cost structure in line, I think our cash position sort of is sort of around this level bottoming now and with an improved cost structure going forward and a lift in revenue, we should be well positioned. I think it's worth noting we do have that line of credit that is also undrawn at this point in time. So we feel comfortable with our cash at this point in time. Okay. Got it. Thank you. Thanks.

I would now like to turn the call over to Bob Lyons for closing remarks.

Thank you, and thanks, everybody. I have a normal script where I would just say thanks for joining today, but I wanted to actually just add some impromptu comments. I think first and foremost, personally thank our investors, our shareholders, and our analysts for the last six months. It's been a tough six months for all of us, without a doubt, and we're happy to start getting to the other side of that. I also want to recognize Stephen and his team. It's certainly not what he signed up for. But he's been a champion. He brought in a great team. We've got a phenomenal finance team and a legal team as well. And they've pretty much carried this on their shoulders for the last six months. And at the same time, while they were doing that, the rest of the management team got together and said, we're not going to let this be a distraction. We're going to keep pressing forward with the transformation. And so with that context, I just want to highlight a few things that are really important. In August of 2021, we said we were going to transform this company into a technology edge-enabled solutions company. And we laid out how we were going to do that and that we were going to be a security company, an apps company, and move up stack with video. You fast forward to today and we have a much broader set of blue chip customers, clients that are relying on us to run their mission critical applications and jobs. We have in fact become a security company in a meaningful way. And if you remember back then we said that we were going to leverage machine learning and artificial intelligence as a foundation for our security so that we can do it faster, and more effectively and that's exactly why we're winning awards and that's exactly why we're seeing the results we are. So, Ajay's done a great job of driving that strategy. We've completely retooled our marketing and sales team and designed that for what we're becoming. Starting to see the early signs of progress for that. Our products and our portfolio now are broad and there's a lot of synergy with our portfolio and we're able to drive that and drive value differentiation. And so, we're pretty excited about where we are. You know, in addition to that, we also said we have to become profitable. And we demonstrated in 2022, we took out $50 million. And as Steven and I mentioned, we're on track to take out 85 to 90 this year. And we have a pretty meaningful pipeline of things ahead going into 2024. So we'll continue to drive costs out of the business and move towards positive cash flow and positive EBIT as well. And so when you add all that together, back to our original improve, expand, and extend, we are definitely improving the profitability and, of course, to continue making progress there. We have definitely redesigned our ability to drive commercial progress, and our portfolio. I think it's hard to argue that we haven't done a great job there with all the work we're winning and the traction we're seeing. So still a lot of work to do. Transformations are bumpy and they're not smooth. But I wanted to thank everybody for their patience and recognize those that are really working hard. And we continue to push this company forward, and I'm really excited about what we can do and haven't really lost sight of that fact. So thank you, everybody, for your time today, and I look forward to further conversations in the future.

Thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation. You may now disconnect.