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spk01: Good afternoon, and welcome to the Limelight Network's first quarter 2021 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Dan Bonsell, Chief Financial Officer. Please go ahead.
spk05: Good afternoon. Thank you for joining Limelight Network's 2021 First Quarter Financial Results Conference Call. This call is being recorded today, April 29, 2021, and will be archived on our website for approximately 10 days. Let me start by quickly covering the safe harbor. We would like to remind everyone that we will be making forward-looking statements on this call. Forward-looking statements are all statements that are not strictly statements of historical fact, such as our priorities, our expectations, our operational plans, business strategies, secular trends, and product and feature functionalities. 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 report on Form 10-K. The forward-looking statements on this call are based on information available to us as of today's date, and we disclaim any obligation to update any forward-looking statements except as required by law. Joining me on the call today is Bob Lyons, our President and Chief Executive Officer. Bob will start today's call detailing recent accomplishments in pursuit of our three strategic pillars for growth. I'll then review financial results in detail. Following that, Bob will use the remainder of the call to discuss our plan going forward. We will then open the call for Q&A. I'll now turn the call over to Bob. Thank you, Dan, and welcome, everyone.
spk02: In last quarter's call, we outlined the foundation of our strategy to improve shareholder value. It is supported by three pillars, each of which balance our immediate and longer-term growth and profitability objectives. They are, first, improving our core, which focuses on client performance and profitability. Second, expanding our core, which focuses on improving our land and expand commercial motions. And third, extending our core. focused on pursuing additional solutions and non peak traffic customers to diversify our revenue and improve our network utilization. I also shared my commitment to transparency and accountability. Having had 90 days to dig into more detail, let me share a bit more color on our loss of momentum in our recent three quarters. As previously discussed, price compression has been a significant contributor. Additionally, we have seen some reductions in our traffic related to client SLA performance. Our plan is to return our company to our heritage of delivering best-in-class performance to our clients. It is something that our people take deep pride in, but we simply lost our focus. Over the past 30 days, we have gotten refocused and are again fully committed and resourced to support our best-in-class performance heritage. We have implemented a rigorous and disciplined process that spans all aspects of our network and our client operations. More specifically, we have established an advanced performance engineering team a collection of our most talented engineers who are chartered with the sole purpose of ongoing tuning and performance and improvement across our client-defined key performance indicators. We have also refreshed the discipline and training of our operational change management. We have strengthened our client success practices with improved tools and processes, enabling us to engage with a much deeper client understanding. And last, each of these teams and processes operate with a daily stand-up meeting and a weekly war room review process. Our industry typically competes on fractions of a percentage difference in performance. With our initial performance improvements, we have experienced the following results. We have seen a top client metric rebuffer rate improve by up to 30%. Our global network throughput has increased by up to 20%. An increase in our Latin America traffic by 40%. And most importantly, we have seen an increase in share of traffic from several large customers. These early indications of progress are no doubt moving us in the right direction. Still, there remains more work to do. At this time, I will turn the call over to Dan to report first quarter financials, guidance for the remainder of the year, and how we expect to achieve that guidance. Dan?
spk05: Thanks, Bob. Given our earnings call in February was less than two weeks into Bob's tenure as CEO, we decided to hold off issuing guidance for 2021. We have used the additional time to critically evaluate our performance with our customers and our cost structure. We realize that we need to reestablish our credibility and transparency in the marketplace, not only with our customers, but with our existing and potential shareholders. At this time, we believe revenue will be in the range of $220 to $230 million, gap loss per share in the range of 35 to 25 cents, non-GAAP laws in the range of $0.15 to $0.05, adjusted EBITDA between $20 and $30 million, and capital expenditures of $20 to $25 million. We believe the performance and client success initiatives we are currently putting in place will have a significant positive impact on our market share with our clients, but will take another quarter to manifest into positive top-line growth. These performance enhancements are expected to result in significantly improved operating metrics in the second half of 2021. Additionally, last month, we reduced our workforce by approximately 16%. While difficult to see many of our colleagues and friends leave, it was a necessary step to begin the transformation of Limelight. We expect annualized run rate savings from this action of approximately $15 million, primarily in the SG&A operating expense line items. and will drive improvements to the bottom line as soon as the second quarter. Just as important as the expected savings, this demonstrates we are focused on immediate action and firmly committed to improving our financial position. We expect to continue to show incremental gains as we implement the strategy laid out by Bob. Now on to first quarter results. Revenue for the first quarter was $51.2 million, a decline of 10% from the first quarter of 2020. The flow-through impact of price compression with the number of our largest customers that we mentioned last quarter continues to have an adverse impact on year-over-year results. Given the concentration of our revenue base with a small number of customers, price compression has a significant impact on our financial performance. Our new operating model will allow our client success team to better align performance with clients' expectations. They are also more closely monitoring and tracking our performance against the metrics our customers care most about This will enable us to more quickly identify and adapt to changes within the ecosystem. With improvements to our performance, we expect volume growth to exceed the price compression driving revenue growth and gross margin expansion in the second half of the year. Our top 20 clients accounted for approximately 79% of total first quarter revenue. International clients accounted for 44% of total revenue in Q1, compared to 39% a year ago. Approximately 14% of our first quarter revenue was in non-US dollar denominated currencies, up from 11% last year. Cash gross margins declined to 36% from 46.8% in the first quarter of last year. Given our mostly fixed cost infrastructure, the revenue decline due primarily to price compression drove the reduction in cash gross margins. Our cost per gigabyte delivered decreased approximately 13% in the first quarter of this year, compared to the first quarter of last year. Continuing that trend, we believe there is a significant opportunity for us to improve gross margin as we improve our network asset utilization and focus on our cost structure. Most of our largest clients offer OTT video streaming services. These clients have similar traffic demand profiles requiring peak capacity for only a short period of the day, leading to poor asset utilization. By diversifying this customer base, With more off-peak traffic, we believe we can significantly improve gross margin. Our current network utilization is in the high teens. Every 100 basis points of utilization improvement can improve gross profit between $5 and $9 million, depending on the region and average selling price. We have also built out a pot monitoring and optimization model to dive into costs by locality, country, and region. This level of visibility will allow us to identify anomalies in cost structure in a more disciplined manner and develop action plans to drive down costs. Total operating expenses were $36.3 million. Excluding restructuring and transition related costs, totaling $11.7 million, operating expenses would have been $24.6 million, a decrease of 4% year over year. Total restructuring and transition related costs include $5.8 million of cash for employee severance and consulting expenses, and $5.9 million related to non-cash equity award modifications. Of the $11.7 million, approximately $4.8 million is recorded in general and administrative expenses. The $15 million in annualized savings that I detailed earlier will be allocated to the following line items. $1.5 million in cost of revenue, $1.5 million in G&A, $9 million in sales and marketing, and $3 million in R&D. We expect restructuring and transition-related charges to be approximately $6 million for the remainder of the year as we continue work with our external consultants in evaluating process improvements to optimize performance, reduce costs, and improve gross margins and overall profitability. Net loss in the quarter totaled $25.5 million in adjusted EBITDA with a loss of $3.3 million. On to cash flow and the balance sheet. Cash and cash equivalents of $117 million decreased $6.8 million. Capital expenditures were $6.6 million during the quarter. DSO at the end of the quarter was 51 days compared to 49 days at the end of December. We anticipate continued DSO performance in 2021 within our normal range of 50 to 60 days. With that, I will turn the call over to Bob.
spk02: Thanks, Dan. Let me reiterate why I joined the company in February. Simply put, I joined Limelight because I'm a big believer in investing in asymmetric risk. Here, the challenges are temporary, but the opportunity is long and without limit. We will be relentless in our pursuit to become the company we all want Limelight to be. Within three years, we aspire to be a Rule of 40 company with material accretion of shareholder value. We are making progress with performance, operational discipline, and expense management. To support the ongoing pace of our recent progress, we have extended our relationship with Alex Partners. They have a strong belief in the opportunity at Limelight and have indexed their fee structure to be directly aligned with shareholder value creation. Now let me unpack each of the three pillars in a bit more detail. The efforts to improve our core will continue to focus on our performance and cost structure. In addition to the aforementioned actions we have taken, we have also identified a number of additional opportunities to improve our gross margin and improve our operating performance. In pursuit of improved capacity utilization, we have begun evaluating specific action steps on a pop-by-pop basis. This will help us align our hardware infrastructure and peering capacity and identify underutilized pops to drive sales initiatives and or cost reductions. On a solid foundation of performance and cost efficiency, we believe there continues to be significant opportunity to expand market share with our current clients. We believe we have an opportunity to continue driving improvements in profitability and growth by extending the use of our network to new clients with new solutions that utilize non-peak traffic solutions. This is the premise of our extend pillar. Our clients are focused on creating better digital experiences for their customers, and their digital builders need to load content faster, personalize it more, and protect it outside of a controlled environment. They are seeking to augment the scale and centralization benefits the cloud offers with a low-latency, real-time processing, and security-enabled edge network. Our goal as an organization is to put powerful differentiated edge capabilities in the hands of our clients. We have begun the required assessment and planning work in support of this pillar of our strategy. I am confident that we are on the right path to achieve our revenue and profitability objectives. Our go-forward strategy will result in overcoming short-term headwinds and optimize our unique position to address a large and growing unmet market opportunity. To do so, We will leverage our crown jewel, our ultra-low latency, global network, and operational expertise. I look forward to sharing more details on these actions and the strategy elements I have highlighted in our to-be-scheduled early summer strategy update. An announcement of the date and participation details will be shared approximately one month in advance of the event via press release. Please join us for the discussion where feedback and questions will be welcome. With that, operator, please open up the lines for the question and answer session.
spk01: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Greg Miller with Truist Securities. Please go ahead.
spk08: Thanks, guys. Thanks for the guidance and taking the question. I would have guessed that you would have given yourself a little more time before planting such a personal stake in the ground, but we really do appreciate the outlook for the year. But I wanted to talk a little bit about just the swing to the business that we had seen late last year and this year. you don't typically see that sort of change in revenue trajectory in the CDN business unless it's either a letdown of a large customer or a performance issue. I guess you're alluding to it might have something very much to do with price. But in the guide today, it seems that you've largely fixed whatever was wrong for the cause of the downdraft. Can you give us any additional colors relating to what might have been happening behind the scenes that gives you confidence 21 can look a lot like given the last two quarters sort of established a different trajectory.
spk02: Yep. Hey, Greg. How you doing? It's Bob. Thanks for the question. It's a great question. I'm going to unpack two parts of your question. You know, one is how we feel comfortable giving guidance with where we are today. And then two, I'll go into more color because I think the two are closely tied together. You know, as far as the guidance, we try to look at macro factors as well as micro factors. and how we roll them up. And so when you look at some macro trends that we have in the industry, I think what we're seeing is, you know, a little bit of a reversion back to the mean as far as this time last year, the whole world was in lockdown. You know, people were watching a lot of TV and it's starting to revert back to normal. So that's a little bit of a short-term headwind for us. I think on the other side of that coin, though, is the industry continues to expand at a pretty rapid pace and continues to grow. So, you know, we see those as somewhat neutral other than maybe some timing issues. If you look at the micro factors, which is largely what has impacted us, and both the reason for the last few quarters of challenge and also the reason to why we feel optimistic for the upcoming quarters is that obviously we talked about the price compression. That's here to stay. It's never going away. But in addition to that, in our business, it's pretty easy. We get traffic from our clients. And our clients decide how much traffic you get compared to what they give to other people based on your SLA performance. And there are a few metrics that really matter. And when you're in first place or second place, you get the lion's share. And when you're in third or fourth place, you get much less than the lion's share. And historically, we have always been in first or second place. Over the past year, though, we lost our focus and we slipped. And it's a combination of a few competitors getting a little better. But largely, quite frankly, we just took our eye off the ball. And so over the past 30 days, we looked at that. And in the forecast, we went by, you know, client by client, bottoms up forecast based on where it is today, based on where we think we're going to get to with improvements in performance. And that's where we built the forecast. And so quite honestly, Greg, I could make an argument why it's a conservative forecast. I could also make a strong argument why there's risk in the forecast. And so what we really try to do is, you know, kind of put it right down the middle of the fairway and say this is what we think is the right position to have right now. So having said that, to put color on the performance issues, it's very simple. There are a few metrics that clients look at and how they divvy out volume. And we slipped on some of those things. There's things like rebuffering rate, things like application playback failures. And the difference between us and the next person could be a half of a percent or a fraction of a percent, but it's very meaningful in traffic. And so we had some issues last year. And quite frankly, we had clients put us in jail and turn some of the traffic down. And we felt that in Q4. We felt that in Q1. And we continued to dig out of that. What I'll tell you, though, one of the reasons why we feel pretty optimistic is that over the past 45 days, we've really gotten back to the basics, gotten really dialed in on performance improvements, a lot of the things that we talked about in the opening. And we've seen in the last 14 to 21 days, pretty meaningful upticks in performance. We're back to number one in many positions and two in others and quickly pursuing number one. And it's translated into seeing new traffic over the past 14 days. In fact, out of the press, we had two of our previously top five customers today just this morning tell us that they were going to dial us back up based on the improvements over the last 30 days. In fact, I'll share a couple of quotes that came from the meeting. I'm not going to share the names. I don't think that'd be appropriate, but You know, the quotes from the customer were, Limelight has taken their breakdown of performance and quality and reliability very seriously. Clearly, you guys have been very busy over the past 45 days, and the efforts show promise. And, oh, by the way, the meeting that we had today and over the past few weeks are some of the best both in content and presentation that we've seen from Limelight in a long time. So we have, you know, two of our marquee customers who are taking us out of jail, and we're pretty excited about that. And that's literally, you know, as of this morning. No doubt about it, we had some bumps over the past few quarters, but we feel pretty good about the progress that we're making now.
spk08: Thanks a lot. That's very, very helpful. I appreciate that.
spk02: No problem at all.
spk01: The next question is from Brett Feldman with Goldman Sachs. Please go ahead.
spk03: Yeah, thank you for taking the question. You made the point about how some of your largest customers are in the OTT space. But that leaves you with a significant amount of off-peak excess capacity. So I sort of have two questions there. The first is, you know, when I look at the expanding number of OTT services, I guess I would have intuitively guessed that that would have been a bit more of a tailwind for your business, not just from a traffic standpoint, but from a traffic diversification standpoint. So I would imagine that actually probably has a constructive impact on your pricing. So I was hoping you could maybe give us some insight as to maybe why that hasn't played out to your benefit yet. And then second, and maybe more importantly, when you talk about the significant amount of excess capacity at off-peak times, what would you think of as being the principal potential sources of traffic? You know, what are the customer sets you historically have been targeted, and how well positioned are you right now to go after that, or are there additional hires or investments you need to make to be able to pursue those opportunities? Thank you.
spk02: Yep. Yep. Thanks, Brad. Great question. So I'll start at the beginning. The reason why doing more OTT doesn't necessarily improve our utilization is because it's really about the demand curve. And if you have a lot of customers who people watch TV at the same time, regardless of what source they go to. And so the issue really is the demand curve. And if you look at the math of our business, if you have 24 hours of capacity, And the vast majority of your demand comes in a six hour, five to six hour window. Mathematically, you can never really get the utilization of your network over 20%, even if you have more OTT traffic. And in fact, that sometimes makes it worse because you build for peak capacity and all you're doing is really creating more latent capacity that costs a lot of money. In addition to that, one of the significant advantages that we have is the fact that we have our own private IP backbone, something that's unique in this industry. And that costs a little bit of extra money and it adds to fixed costs, but it's also why we've been able historically to be always number one or number two and why we'll get back there pretty quick in doing that. And so what happens is if you put more traffic that's the same kind of demand pattern, you create more peak and more latent capacity. So when we talk about diversifying Revu, the question really becomes, given that IP backbone that we own and pay for, we have, let's say, 18 hours a day of ultra low latency, high quality network bandwidth in every major city across the world. It's really, you know, unparalleled. And so the question becomes, what are those business solutions that we can leverage that and we can significantly go out and offer with a cost advantage because right now we're paying for that bandwidth even though it's not being used. And if we could, you know, leverage that bandwidth to bring solutions to market that gives us a significant performance and cost advantage, and at the same time drives our utilization of what would those look like. And so, you know, we'll talk a lot more about that in our, let's say, mid-June strategy summit. But, you know, what I'll tell you, the types of things that we're looking at that can fill that at scale are things like getting involved in the web, small object side with web acceleration, web performance. Of course, security is a big play in there as well, but not traditional security that is perimeter-oriented, more threat detection and analytics and log ingestion, you know, things where you're doing a lot of real-time data that happens during the day. Things like cross-connect, where enterprises are now moving towards a more hybrid environment, and they have multi-cloud, they have SaaS applications, and they might still have premise locations, and they have to be able to move data around seamlessly, efficiently, and more cost-effectively between their enterprise. And our network is ideal for that kind of thing, and we just haven't really approached it that way. Those are all the kind of conversations we're having. We're working through all those things. What I can tell you is that what we do pursue, we'll be much more clear about that in the early summer meeting. And it will be the things that definitely leverage our network and give us a unique right to win in the marketplace and where we can drive our utilization up at the same time. And as Dan pointed out in the opening comments, for every point of utilization that we can improve, it's anywhere from $7 to $9 million, $5 to $9 million, depending on the region. that flows right to the bottom line. So it's a very meaningful opportunity for us.
spk03: Great. If you don't mind, I ask you a different question. You know, early in my career, I worked at an emerging growth company that hit a speed bump and we had to do a force reduction. And, you know, it definitely takes a bite out of the culture. And I'm just curious, you know, what have you done with the people who are staying on here to make sure that they're motivated and excited and incentivized? It looks like there was an uptick in stock-based comp in the quarter, so it seems like there may have been some incremental equity awards Is that something you think might be persisting for a few quarters to make sure everyone has sufficient upside as you get the company turned around?
spk02: Yeah, that's a great question, Brett. And unfortunately, when you're coming in and you're trying to say, hey, we're going to drive a lot of change at the same time, you know, have an event like we had, which really dilutes trust, it's a challenge. So there's a number of things that we're doing. Number one, we're focused on a lot of communications. I probably spent three hours already today having conversations with the organization, taking them through the strategy, giving them reasons to believe. Quite frankly, we've been pushing the organization pretty hard as well. And so when they got the wins that we just mentioned a little while ago, that puts a lot of wind in people's sails. What I found here, the people really want Limelight to be the company it should be and are passionate about it. And what we need to do is really just help them do that. So a lot of communication. We actually are in the process of redesigning a performance reward, pay for performance program. So those people that really step up, you know, what I tell the employees, exceptional performance will get exceptional results for them. And, you know, standing behind that. So we're doing all those things. But it's a really important part of it. You know, the other thing that we're doing is bringing the employees into the solutions. Instead of telling them here's what we need to do, we're saying here's the problem, let's figure it out together. And, you know, they really embrace that and get energized about that.
spk01: Thank you for taking the questions.
spk02: No problem at all.
spk01: The next question is from Robert Majek with Raymond James. Please go ahead.
spk04: Great, thanks. I'll add my appreciation for the full year revenue guidance that you just gave. And I know you don't guide quarterly, but to achieve the midpoint of your guide by just doing the math, one could assume a ramp throughout the year to perhaps a $60, $61 million figure or so in Q4. So just kind of annualizing that, can you just help us understand how we get from $200 million in run rate business in Q1 to potentially a $240 plus number in Q4? in the face of what could be tougher, could be a tougher traffic environment for CDN as people get vaccinated and head outdoors? Or do you have visibility on some large net new business that might offset that cyclical pressure?
spk02: Yeah, great question. Let me frame it up and then I'll let Dan, you know, put the details on it. But, you know, we spent a lot of time talking about that. And so on the one hand, you have to look at the market, you know, to your point, people going outside now in the summer, as well as kind of coming outside of, you know, the lockdown from COVID. But But for us, actually, the biggest material opportunity for us is just share a wallet with our clients. And so we looked at each one of those. And I will tell you, I'm not a big fan of hockey stick plans. I very rarely have them, and so I'm always reticent to put those out. But in this particular case, we've done a lot of analysis, and the math behind it actually supports it. As long as we continue making the improvements that we're making, and again, over the last 14 days, if I showed you the trajectories over the last 14 days, you would see that that's where it's really justified on. And we've actually discounted that back. But, you know, 14 days isn't a trend yet. So we really try to adjust it based on what we're seeing over the, you know, the recent trends with the performance improvements, what we know the opportunity is in the top 20 clients that we have and what they've told us is available to us if we continue to improve our performance. And then we try to really gauge that. And that's where we got to the number.
spk05: Yeah, and Robert, this is Dan. And just to add a little bit more color on that, you know, we expect normally we don't go quarter by quarter and issue revenue guidance, but given where we're at and trying to be transparent with our shareholders and where we see things going, we felt that, number one, it was appropriate to give the full year guidance and a little more color in how we expect that to flow through. And with the performance improvements that we've implemented already and expect to continue to implement, to gain that market share back from our customers, we do expect to see the Q2 be relatively flat. from the first quarter, and then that ramp's starting to begin in Q3 and Q4 and sequentially grow throughout the year. And so we've discounted the opportunities in the market share and what we believe we can gain from those customers within that guidance. But like Bob said in his first comment, there's reason to believe that that's conservative and there's reason to believe that's aggressive, and we tried to take a middle road approach to it.
spk04: Yeah, thank you. That's helpful. And also, I appreciate the performance improvements you're making to the network, and thank you for sharing some specific customer feedback. But I guess just taking a step back to the broader large customer group, if they were disappointed with performance previously, are they now satisfied with where performance is today, or are there more improvements that you have to make to retain their business?
spk02: Yeah, so that's a great question. I would say very encouraged with the performance, so much so that we're seeing the traffic return. And in some cases, our largest customer, it's a non-person decision. It's basically a mathematic algorithm that just decides who gets traffic based on the performance. And that's where we've actually seen the biggest uptick. So we're pretty excited about that. What I'll tell you, though, Robert, is if you ask me that question every quarter for the next 10 years, you'll get the same answer from me. There's always more to do, and we're going to be a company that wakes up every day saying, you know, how do we perform better and what else can we do? And that's really the industry we're in. And the same goes for cost. What can we do to be more efficient? What can we do to perform better?
spk04: And if I can, I'll add one last question. Again, I think investors appreciate the steps you're taking to improve EBITDA profitability. But I guess it raises the question, especially given how you're highlighting how important performance is, could the cost-cutting actions you're taking negatively impact, again, either performance or your sales motion? Or maybe you can just kind of help us understand why that wouldn't be the case.
spk02: Yeah, we're very thoughtful about that, and we don't think so. I think for a number of reasons. On the cost side, you know, there's really three areas. I spoke about this a little bit in the first quarter. There's operational, architectural, and strategic ways that we can drive costs down. Operationally, the things that are going to impact people are the ones we did. So, you know, we're done with that. We can move on. We wanted to rip the band-aid off so that people aren't looking over their shoulder. But operationally, we can also do things like more automation, more tooling, using technology to self-heal, to respond to things that historically we use people for, which is less efficient and is also less predictable. So architecturally, we're looking at places where we can, for example, I'll get really tactical for a second, where if we upgrade with a new function in Linux, we can significantly improve the TCP port productivity, and that translates into these metrics for our clients getting better. So we're really at that level of granularity as well. And then strategically, it's all about utilization. It's all about diversification and using that off-peak bandwidth to drive utilization up.
spk04: Perfect. Really appreciate all the detail and looking forward to the summer strategy session.
spk02: Thank you. We're looking forward to it as well. Thank you.
spk01: The next question is from Eric Martinuzzi with Lake Street. Please go ahead.
spk07: Yeah, looking for green shoots here in the business. It looks like you guys highlighted the Latin American traffic. I realize that that is just kind of a volume-based comment there, the 40%, you know, the increased traffic by 40%. Is there a way to translate that into the revenue? In other words, if we're comparing it to a prior quarter, had the price compression already happened in that prior quarter? In other words, revenue from LATAM is up 40% or are there puts and takes there?
spk05: Thanks, Eric. This is Dan. Appreciate the question. With Latin America, over the last year or so, we've been really building out our capacity with some partners that are, you know, well ingrained within the ecosystem in Latin America. And we've added over 2T of capacity down there. And so really it's a volume play for us as well as a performance play for us that, you know, is filling up those pops as soon as we're putting them up. And with Latin America and with the difficulty in getting capacity down there, we actually have a pretty nice premium on the pricing down there, which is also good. There's a lot of competition in the U.S. and developed countries in Western Europe where we really saw a lot of price compression at the end of last year. And so we're just focused on continuing to add capacity where it's profitable for us, and Latin America has been where it is.
spk02: Yep. Hey, Eric, and I just add to that for, you know, additional color on green shoots. In fact, Dan and I just had a green shoots conversation yesterday, as a matter of fact. And so one is, you know, the pieces that you just talked about, but also, you know, we said 45 days ago we were going to get really dialed in on improving our performance. And in the past, I'd say, 14 to 21 days, three of our top five customers have has seen notable upticks in traffic solely because of the improvements in performance. So those are about as good as green shoes as you can get from where we're sitting today.
spk07: Okay. And then given your color, I know we're not talking about guidance for Q2, but just revenue trend, the gross profit margin in Q1 is a bit of a jaw-dropper, and you mentioned, hey, it's volume-related. We've got all these fixed costs out there, but Given an assumption for flat revenue, what can we expect on gross profit for Q2 versus Q1?
spk05: Yeah, still relatively flat on gross profit from Q1. You know, we're working through our cost optimization model to identify any anomalies in different regions where, you know, there's COLO costs that are higher in a particular region and within that region versus other locations within that region or outside. And so we're looking at every aspect of our cost structure and really diving in on the anomalies between our different locations and profitability by locations and who we're serving out of there. And so we expect to continuously make performance improvements. and improvements in our cost structure as we work through the modeling. But those aren't switches that we can turn overnight. We're identifying those issues right now, and we expect to continue to really improve upon our cost structure. But really the biggest driver of how we can improve gross margin is going to be utilization improvements and really driving that off-peak traffic and identifying customers that are different from our existing base of customers that is primarily, you know, nighttime peak traffic. And so working through that process is really what's going to drive profitability and gross margin expansion in the long term. But there are other things that we're not dismissing that can help as well.
spk02: Yeah. And just to add some to that, Eric, to put a little more color on the kind of things we're doing for optimizing, obviously getting more revenue on the fixed cost is the biggest help. But When we talk about optimizing, we're introducing things like stochastic modeling and linear program optimization on our POPs so that we can use technology in real time to help us optimize. And those things are going to take a little time to implement, but when we do, you know, they're going to make sure that we're constantly optimized to improve gross margin.
spk07: Got you. Thanks for taking my question.
spk02: Anytime.
spk01: The next question is from James Breen with William Blair. Please go ahead.
spk06: Thanks for taking the question. So, you know, given the comments on sort of the revenue and gross margins, you look at the income statement, your G&A was up quite a bit and R&D was up quite a bit sequentially. It looks like the G&A was a lot of stock-based comp. Can you just talk about the trends there as we move forward? And then of the cost savings that are coming out, the $15 million annualized, you know, maybe how much of that was recognized in the first quarter, if any? And then, you know, how do we think about that, a step down in some of those costs as we move into the second quarter and the rest of the year? Thanks.
spk05: Yeah, thanks, Jim. I'll add a little more color on sequentially. Really, the big variance sequentially was in G&A. And as we've gone through the restructuring process and really transition process into Bob Lyon's tenure here, there was some cleanup in – equity award modifications from the previous management team that couldn't go through the restructuring line item from an accounting perspective. And so that's what drove the increase in G&A expenses quarter over quarter. Going forward, that $15 million is primarily going to be within the sales and marketing line item. $9 million of that $15 million flows through there, with another $3 million flowing through R&D and a million and a half in cost of revenue and a million and a half in G&A. And so we'll see those benefits right away in Q2. None of those were recognized in Q1. And so, you know, we expect to see anywhere from $3 to $4 million reduction in those line items as a result of the reduction in workforces.
spk06: And the elevated G&A, does that basically go away now? Is that a one-time item in the quarter? One time. Yeah, that's right. And just how much is that? Was that sort of in the $5 million range? Right on. Okay. Great. Thanks.
spk01: The next question is from Colby Cinesel with Cowan & Company. Please go ahead.
spk09: Hi, this is Mike Long for Colby. Two questions, if I may. First, when we think about your strategy update that you're planning for early summer, what should investors expect? Should they expect some form of long-term guidance or just a deeper dive into the current strategy? And then also, when you talk about over the next 90 days, you believe that continued operational improvements will drive increased market share, I just want to be clear. Is it increased market share relative to the lows that you saw, or is this a further step up above what you had seen before any of the performance issues? Just want to make sure I'm clear there. Thank you.
spk02: Yeah, I'll start with the back end and work to the front end of your question. So on the back end, there's really two drivers. We have how much of the share we get, and then there's also how much of the pie is there to begin with. And most of our top customers, their pie is expanding pretty rapidly, and the top five are significantly expanding. And so we, you know, over the past, let's say, three quarters, we have not only lost our share of the expanding pie, but we've lost our relative share to a percentage of, you know, overall. And so we see both of that. We see capturing a higher percentage overall, and the pie is expanding. So, you know, that should be sequentially better than previous years. Obviously, we have the price compression that Dan talked about we've got to work through. But generally speaking, there should be upside. And then on the front part of your question with the strategy, I would expect it to be more focused on here's where we're going, here's why we're going, here's the ways we're going to win in the market, and here's why you know, what we've been saying and, you know, the future of Lime Money is bright. I don't know that we'll get into long-term guidance. We will probably share our thesis around that so that you understand our thinking behind it, but it'll be largely really understanding the roadmap, the pieces that we're putting together, and a more detailed view of how we plan to win and grow. Ultimately, what you should walk away from that conversation is, I understand exactly how they're building a growth and profitability platform and also a way to expand our multiples. I mean, those are the three things, obviously, that are going to improve shareholder values. That's what we're focused on.
spk09: Perfect. Thank you very much for the call. I really appreciate it. No problem.
spk01: Again, if you have a question, please press star, then 1. The next question is from Michael Lattimore with Northland Capital. Please go ahead.
spk00: Hi, this is Aditya on behalf of Mike Latimore. Can you comment about the growth and the traction that you're seeing in the gaming vertical and also on the sports and live events related revenue? How have they been growing and how much do they contribute as a percentage of total revenue?
spk05: Yeah, we don't break it down in those terms. We've mentioned in the past that the majority of our delivery represents about 80% of our total revenue, and so that's the lion's share. And the lion's share of that delivery is video at this point in time. The gaming and other revenue is there, and live events are there, but that's not a significant amount of our monthly or quarterly revenue.
spk02: Yeah, and the live events, real-time streaming, that'll be – we'll discuss that in more detail in the early summer strategy session. That's an area that we're focused on of, you know, where we should and how we can play and win there.
spk00: All right. All right, fine. Thank you.
spk01: Thank you. This concludes our question and answer session. I would like to turn the conference back over to Bob Lyons for any closing remarks.
spk02: Thank you, Operator, and thank you, everyone, for joining us today. In my first 90 days, we have made meaningful progress with much more to do. We are laser-focused on building a platform for profitable growth, and across the organization, we are optimistic in our ability to do so. We look forward to updating you on our progress as we go forward. Thank you.
spk01: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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