Limelight Networks, Inc.

Good day, ladies and gentlemen. Welcome to the Limelight Network's 2021 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 questions and answers session. I will now turn the call over to Sumit Sinha, VP, Investor Relations and Corporate Development.

Good afternoon. Thank you for joining the Limelight Network's 2021 Fourth Quarter Financial Results Conference Call. This call is being recorded today, January 20th, 2022, and will be archived on our website for approximately 10 days. Let me start by quickly covering the safe harbor. We would like to remind everyone that we will be making forward-looking statements on this call. Forward-looking statements are all statements that are not strictly statements of historical fact, such as our priorities, our expectations, are operational plans, business strategies, secular trends, product and feature functionalities, pro forma results, acquisition activity, and contributions from acquired businesses. Actual results will differ materially from those contemplated by a forward-looking statement, and reported results should not be considered as an indication of feature performance. For more information, please refer to the risk factors discussed in our periodic filing, including our most recent report, Annual Form 10-K, and quarterly reports on Form 10Q. The forward-looking statements on this call are based on information available to us as of today's date, and we disclaim any obligation to update any forward-looking statements except as required by law. Joining me on the call today are Bob Lyons, our President and Chief Executive Officer, and Dan Bonsell, our EVP and CFO. Bob will start today's call with a brief discussion of the results and an update on our improve, expand, and extend initiatives. Dan will then review financial results and guidance. Following that, Bob will use the remainder of the call to discuss aspects of our strategy and corporate initiatives going forward. We will then open the call for Q&A. I will now turn the call over to Bob. Bob?

Thank you, Sumit, and welcome, everyone. In the fourth quarter, we continued to build on the momentum started in the third quarter. We had strong sequential revenue growth, gross margin, and adjusted EBITDA margin expansion. We delivered positive non-GAAP EPS and generated over $3 million in free cash flow for the quarter. Revenue came in at $62.9 million, up 14% quarter-over-quarter and year-over-year. Organic revenue growth was 7% year-over-year. Our core content delivery revenue returned to year-over-year growth for the first time in six quarters. Cash gross margin was 44.6%, up almost 500 basis points quarter over quarter and 380 basis points year over year. Adjusted EBITDA margin improved to 15% up from 11% in the third quarter. Layer 0 contributed $3.8 million in the quarter, bringing their total contribution in the year to $4.5 million in line with our guidance of $4 to $5 million for the year. And this despite the fact the deal closed three weeks later than expected. The underlying momentum of the business, supported by leading indicators, validates our strategy and demonstrates we have, in fact, achieved positive momentum in the business. The growth of our pipeline is one of those leading indicators and is much more diverse thanks to our product roadmap and technology strategy. Delivery of our edge-enabled solutions through JAMstack and the Layer Zero platform appeals to a broad range of customers, be it startups, banks, consumer product companies, or telecom. The evolution of Limelight from a media CDN focus to an edge-enabled software solutions company anchored by the high growth, high margins, app ops solutions is well underway. We have been reporting our progress using the Improve, Expand, Extend framework. As a reminder, our Improve program is focused on network performance and operating costs. Our Expand program is focused on revenue growth with existing and new clients and our extend program is focused on introducing new edge-enabled solutions that increase network utilization, growth, and gross margins. Let me highlight the progress we have made in the fourth quarter against this framework. Under our improved program, we have meaningfully improved overall network performance and have fully remediated the performance problems identified in the beginning of last year. Additionally, we continue to make operational and architectural improvements toward reducing our cost footprint. Improved highlights include As reported in our last call, third-party load balancing and data analytics firm PerpOps continues to rate Limelight's performance at number one or number two for global CDNs for the second quarter in a row. When compared to January of 2021, we have improved from not being listed in the top 20 to now being consistently ranked number one in the highly competitive North American market. This is an important proof point of the performance improvements we have and continue making to our network. December 5th was a record traffic day with traffic exceeding the previous record by 18%. December was our highest traffic month of 14% from our previous record almost a year ago. Customer confidence is back and we continue strengthening our customer relationships. We have completed our $30 million of planned annualized cost savings. Additional opportunities remain largely within the gross margin line and we will continue to pursue these to help fund our planned growth initiatives. Our client sentiment scores saw very material gains in 2021, increasing by double digits in the second half of the year across our global top 20. We continue to see sustained customer satisfaction and confidence in our improved performance and increased value as a strategic partner. Network utilization continues to be a focus given its impact on gross margin and EBITDA. We have improved overall utilization from the mid-teens in the second quarter to approaching 20% in the fourth quarter. Fittingly, our EXPAND program benefits from these operational improvements by supporting the addition of new clients and expanding existing clients. Highlights this quarter include, in the fourth quarter, we grew traffic with the two customers that had meaningfully reduced traffic in late 2020 and early 2021 due to performance concerns. We continue working with them on additional opportunities to further expand our partnership. For the third quarter in a row, 18 of our top 20 customers grew revenues by more than 20% year over year. Total bookings increased 45% quarter over quarter. We have closed many new opportunities in the fourth quarter, with more than 10 of those averaging more than $100,000 in annual contract value. We are ahead of plan to expand our growth capacity, and we continue to invest. The pipeline for both solutions, content delivery and app ops, continues to grow. For our core content business, it is the best we have seen looking back several years. The overall mix of our pipeline is also unprecedented. We continue to attract large media companies for content delivery, but with our app ops solution, we are also relevant to a variety of company sizes and types who are looking for a better solution for their high stakes web applications. These companies were out of reach with our previous strategy. On to our extend program. We have fully integrated our Layer Zero acquisition. We launched Layer Zero by Limelight in November, delivering a best-in-class, edge-enabled app ops solution designed for the outcome buyer with integrated performance, productivity, and protection. This leading solution will be further bolstered with additional security offerings to be announced in the coming weeks. A key differentiator for our Layer Zero solution is in its JAMstack roots. This next-generation architecture is gaining traction as demonstrated with two JAMstack-focused private companies funded at unicorn valuations. Our layer zero solution, coupled with our world-class global edge network and robust professional services, enables us to deliver blink of an eye speed, reduced operational costs, and a reduced attack surface for mission-critical web applications. We are seeing that outcome buyers are not just mid-market companies, but also large enterprises. Our strategic thesis has been that tool proliferation is creating complexity and confusion and edge-enabled solutions can address this complexity. We are seeing validation of this strategy across companies of all sizes and scopes. The combination of Limelight's global network and Layer Zero's edge and application solutions have quickly come together and demonstrated value. During the quarter, we had a new logo win with a large global consumer products company that owns about 100 household name brands in their product portfolio. Just two months back, we would not have been in consideration for this RFP, and today we are not only in the conversation, but more importantly, are winning and taking business from our competitors. We have many similar opportunities in our pipeline and are adding resources to accelerate our sales efforts. On the third quarter results call, we indicated that we will continue to invest in rebuilding our sales team At that time, we were tracking at about one hire a week. In the fourth quarter, that pace accelerated. We leveraged our internal network to attract others who saw the turnaround at Limelight and were excited to jump in. Our pivot from a media CDN to an edge-enabled solutions company and our best-in-class layer zero solution is resonating with people that want to be part of something unique and growth-focused. We expect to continue our pace of investments and now expect to mostly complete our hiring goals for this year by the end of Q1, a full quarter ahead of plan. There remains a lot to be done, but we continue to be energized by the progress we have made and the opportunity in front of us. The trajectory and outlook of our business, supported by measurable leading indicators, organic revenue growth, gross margin, and adjusted EBITDA progress is positive. We promised our clients, shareholders, and employees a new and improved version of Limelight, And these proof points confirm we are, in fact, demonstrating our ability to execute on that promise. At this time, I will turn the call over to Dan to report fourth quarter financials. Dan?

Thanks, Bob. Revenue for the fourth quarter was $62.9 million, a growth of 14% from the fourth quarter of 2020. Layer zero contributed $3.8 million, which implies 7% organic growth in the quarter. This is a significant recovery from revenue declines of 17%, and 8% in the last two quarters. We have returned to year-over-year quarterly revenue growth and expect that to continue throughout 2022, but more on guidance in a moment. We delivered this performance despite global supply chain headwinds. Barring this macro event, we would have come in at or above the high end of guidance. Our top 20 clients accounted for approximately 74% of total fourth quarter revenue compared to 75% last year. Cash gross margins expanded to 44.6% from 39.8% in the third quarter due to revenue growth, higher traffic, and realizing cost reduction measures. Total cash operating expenses were $18.4 million, or 29% of revenue, down from 34% of revenue in the fourth quarter of 2020. We continue to realize the benefits from our improved management of operating costs. As previously mentioned, we continue to invest in sales and marketing and have hired ahead of plan given our ability to attract qualified talent. The aforementioned operational improvements resulted in a meaningful sequential increase of adjusted EBITDA to $9.7 million from $6.1 million in the third quarter. This represents approximately 60% improvement sequentially. Scaling revenue and the corresponding operating leverage in the business allowed for 46% flow through of the sequential revenue growth. Cash and marketable securities total $79.3 million, an increase of $3.5 million. We spent $3.7 million for capital expenditures. ESO at the end of the quarter was 64 days compared to 77 days at the end of September. And as expected, it is migrating back to our historical range of 50 to 60 days. On to guidance. Based on our rigorous budgeting process, forecasts from our larger clients, and being cognizant of hardware supply chain constraints, as well as COVID-related traffic patterns, we are guiding 2022 revenue in the range of $240 to $250 million, implying a 10 to 15% top-line growth. Based on our previously provided guidance of $20 million in 2022 revenue for layer zero, this implies our organic business growth of 3% to 8%. With existing products being traction and new products to be launched over the next few months, we are also accelerating investments in rebuilding our sales team. And as previously mentioned, we expect to complete most of the hiring in the first quarter. As a result, we are guiding to an adjusted EBITDA range of $24 to $28 million for 2022. This implies GAAP EPS loss in the range of 22 to 27 cents and non-GAAP EPS loss in the range of 1 to 6 cents. This range of guidance is what we view as a highly expected outcome. One final note, for modeling purposes, we expect about 141 million shares outstanding at the end of 2022. With that, I will turn the call back to Bob. Thanks, Dan.

I thought it would be helpful to take a few minutes to talk about three topics that are important to us and I'm sure are important to you. Our long-term vision, M&A strategy, and 2022 priorities. Let's start with our long-term vision. If there is one thing to take away from this call, it is that the transition of Limelight from a media CDN to an edge-enabled solutions company is in full swing. We have one of the largest and best performing edge networks in the world. In support of this strategy, we continue to invest in modernizing our edge platform beyond cash to include compute capabilities able to deliver various types of edge-enabled solutions. This supports our business improvement objectives in a few meaningful ways. Our total addressable market expands from $12 billion to beyond $37 billion. Within this TAM, we can address a more diversified set of clients and solutions supporting improved growth and network utilization. With improved utilization and SaaS-like solutions, we can continue to improve our growth rates and our gross margins. Accelerating growth with higher gross margins enables us to further invest in more growth. Layer 0 was the first of what will be many meaningful steps in support of this strategy. We will continue to extend our solutions with investments in security and connectivity solutions at the edge. Our edge-enabled solutions will continue to focus on helping outcome buyers address the cost complexity and security issues associated with handling large, complex and distributed high-stakes web applications. And by the way, the pandemic has only exacerbated this problem. Now, companies have to manage the performance, cost and security of distributed workloads that are accessed by distributed workers. While these are exciting growth opportunities for us, we also see an opportunity for continued growth in our content delivery business. We believe there are some secular tailwinds most notably the rise of advertising video on demand, or AVOD, live events, and increasing adoption of 4K. We are now well-positioned to benefit from these tailwinds given our improved performance and lower operating costs. In total, these improvements enable us to transition from a low gross margin, usage-based model with customer concentration, to a company grounded in recurring revenue, having a diversified customer base, and maintaining high gross margins that can support further investments and growth. Let me take a minute to highlight our M&A focus. We have seen tremendous success with Layer 0, and we continue to look for assets that can be actioned in a way that will both accelerate our strategy and create immediate shareholder value. Many of the capabilities required in our long-term vision will be organic, but some will be through acquisition. We are and will continue to be both inquisitive and disciplined in our approach. We have an underutilized network with significant capacity that we can put to work to create shareholder value, and we continue to look for partners who can also benefit from a shared vision similar to what we have done with Layer 0. We do have a strong balance sheet and access to capital for the right deal. To answer your question on the types of acquisitions we look for, first, assets that help us expand our overall industry scale position. Second, assets that bolster our security and app ops solutions. And third, assets that will help us launch and accelerate our edge-enabled connectivity strategy. Now, let me highlight a few of our key priorities for 2022. First, productive growth capacity. We have seen meaningful productivity improvements resulting from our redesigned land perform and expand model. We are also pleased with the caliber of new salespeople we have been able to attract in the last few months. With this improved productivity and our ability to attract top talent, we can now accelerate the expansion of our commercial growth capacity. Second, edge architecture. Network performance is and will continue to be a key focus of ours. We will continue building on our recent progress with architectural improvements. As an example, we have identified a set of architectural opportunities that could increase capacity and overall throughput by as much as 30%. The progress made in 2021 was meaningful and we will continue to build on that progress. Third, automation. We are leveraging the deep software skills attained with our Layer Zero acquisition to increase automation across our business. This will improve efficiency, quality, and increase productivity. Fourth, developer ecosystem. Our developer-first focus with Layer Zero is critical to our product roadmap. We are making investments in marketing to the developer community focused on integrating their preferred tools with our AppOps solution. Our solution is currently fully integrated with over 40 popular developer frameworks. This is more than two times that of our leading competitor. Fifth, edge-enabled solutions. We are building a profitable, growth-oriented company. In support of that, you will see a steady stream of new and improved product announcements from us. Some of it will be obvious, such as the security features to be launched this quarter, and some of it will be more subtle, such as the GraphQL that was launched last month. Each announcement will be grounded in our new continuous customer value-focused product delivery mentality. But all of this will focus on having core IP that delivers the best price performance feature set for the outcome buyer by leveraging our edge platform. Overall, we are very happy with the progress the team has made in such a short time. Our energy and optimism remains high, and we are steadfast in continuing this momentum. We remain committed to creating unmatched value for our clients, returning meaningful value to our shareholders, and building a company culture that inspires and grows our employees. We thank our investors for their continued support and look forward to working together to achieve what we all know is uniquely possible for us. With that operator, please open up the lines for the question and answer session.

Certainly. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. The first question is from the line of Colby Simaesel with Cohen and Company. You may proceed.

Hi, this is Michael. I'm for Colby. Two questions, if I may. I think you may have addressed this earlier, but I just wanted to clarify. Last quarter you had noted that two of the top 20 CDN customers that you had had not fully rebounded or didn't rebound as quickly as expected. Have you seen the traffic from these customers rebound fully now and is it back above what was the prior high watermark for those customers? And then second, you've talked about additional cost savings opportunities that you can drive in 2022. Any color on how much of that is baked into your current guidance? Thank you.

Hey, Michael. Thanks. It's Bob. How are you? Two great questions. The first one in regards to the two that came back, we started to see that traffic come back in Q4. We planned conservatively for this year. So we have them in flat year over year. But I will tell you, coming out of the gates, they're proving to be ramping faster than we have in plan. And so that's a positive thing. It's early, obviously. And so we'll see how the whole year plays out. But we see them as strong relationships. They are coming back. And if they come back at a rate that we're seeing right now, you know, that'll be goodness for us. But, you know, it's still only January, so we'll see. But we're feeling pretty good about those relationships. And the second question was the cost savings. Yeah, and the second question, so there are a number of things. You might recall back in previous quarters, we talked about the fact that there were operational savings that we wanted to get last year, which we did. That was the $30 million. We've also identified a number of architectural savings that essentially are going to hit the gross margin line. And we have identified, we have some of that baked into the plan, what we think is a reasonable number. There's an opportunity to outpace those savings. But, you know, any time you're doing architectural changes to your network, you want to be very thoughtful, slow, methodical. And so we took a pretty conservative approach to that based on the fact that we don't want to go too fast and get savings and then go back to some performance problems. So we took a very, you know, cautious approach in the plan. But there are meaningful opportunities for us to improve our gross margins to numbers that will allow us to support continued growth going forward, investments and growth.

Perfect. And if I could squeeze one more question in. You just talked about margins and the opportunity to expand them. And also in the press release, you highlighted that you see yourselves driving higher margins as you transition to that edge-enabled business. How are you currently thinking about the long-term margin potential for this business as you complete the transition? Thank you.

Yeah, I think I touched on this at the analyst day a little bit, and I'll go back to that conversation. I'm pretty sure you were there if I remember right. The way we think about it is really think about us in two businesses. Think about us as our core content delivery business. We've historically had challenges in that margin. We'd like to get that north of 50%, so somewhere between 50% and 60%. We see a path to get there based on the things I just talked about. It's not going to happen super quickly, but it's not a someday conversation either. It's a very thoughtful, you know, over the next 12 to 15 months kind of thing. When you look at our app ops business, you know, that's more of a SaaS-like business, and those margins, you know, are north of 70%. And so when you blend those two things together, we'll improve our overall margin just by running the business more efficiently with the things we have planned for this year. But as we, you know, have more app ops revenue, is a part of that kind of weighted average, you know, our overall margins will go up as well. So when you take that, you know, as we improve that number, you know, you should see us looking at, you know, north of 60% kind of on a strategic basis. But we're not going to put any timelines around that at this point.

Perfect. Thank you so much, guys.

Thank you, Mr. Senezo. The next question is from the line of Mike Lattimore with Northland Capital. Please proceed.

Thanks, yeah, and congratulations on the strong results there. In terms of layer zero in the quarter, can you provide any color just on the bookings, how the bookings play out in the quarter for layer zero, you know, whether sequentially or year over year, and then, you know, is this new logo or expansion kind of deals?

Yeah, sure, I'll take that. Thanks, Mike. It's nice getting the congratulations on the quarter, so appreciate that. On layer zero, we came out with the guidance of roughly $4 to $5 million of layer zero revenue for the year. We would have exceeded that number had we closed the deal in the timeline that we originally thought it was going to happen. And so we feel really good about the layer zero momentum that's being developed, the product launch that came out. a couple of months ago that we announced and continued feature functionality announcements around that product. In next year's guide, we have approximately $20 million of layer zero revenue. And so if you just take a look at the run rate right now at roughly $13 to $14 million and model that out to the number that we're expecting in 22, We feel very strongly about the potential and the growth that we have in the model and even an opportunity for some upside there.

Great. And then with regard to the two big customers, I think you said you've modeled that kind of flat, but they're exceeding that expectation so far. I think one of the drivers of that was just more new content coming online. I guess, is that still one of the key drivers and how is that going?

Yeah, that's a component of it. New content always helps, and that helps everyone who's involved with the delivery of that particular customer's content. But I think the bigger opportunity and what we're starting to see here in Q4 and into Q1 already is the performance improvements, I think, are actually contributing to some market share gains that we're seeing. There's still not a ton of new content. coming out for particularly our largest customer, but we're still seeing some pretty nice traffic gains from where we were in Q2 and Q3, and I think that's solely based on our performance and our relationship with that customer that we feel is very strong.

Yeah, I'd like to add to that, Mike. Yeah, one more addition to that, Mike. We're coming out of the gates pretty strong, and one of the questions I ask the team is, hey, what's driving that? And And the answer when we did the research was it's a number of customers across the board. So it's just general, you know, good performance across the board, which is also nice. There's no concentration with that performance.

Okay. Got it. Thanks. Thank you.

Good luck. Thank you, Mr. Lattimore. Next question is from the line of James Green with William Blair. You may proceed.

Thanks for taking the question. Just a couple of questions on traffic. You know, there's a press release that you hit new traffic records on December 5th. Just some thoughts there around, you know, was it a broader market expansion? You know, do you gain back the share or are you sort of growing your share in line with where the market is? And any comments you have just around pricing in general? You know, how much did you have to give up from a pricing perspective to gain the traffic? Thanks.

Yeah, on the traffic, I mean, December was really strong for us. And as you can imagine, some of our larger customers, especially some of the larger download customers, around the holiday season, they see a significant uptick in traffic as new gaming consoles and new games come out. And we participated in that, especially on a customer that we let go of a couple of years ago based on some price points that they wanted to get to that we didn't feel were profitable, but based on how we're structured now, the cost savings that we have in place, the load balancing that we have in place with that particular customer, we're able to make that an attractive proposition for both parties. So I think that was primarily the driver of traffic as well as, as Bob mentioned, The broader base of our customer, the 18 of the top 20, continues to grow at significant pace. That grew at over 20% for the third quarter in a row, and so we're very excited about that. Diversification of our customer base continues to move along, and it's because those 18 of the top 20 customers continue to grow their traffic with us based on our performance improvements. Um, and then your second question was related to, um, remind me what your second question was. Um, just, yeah, just on the price in general in the market. Yeah. Pricing. Um, you know, in, in 2020, I think, uh, you know, with COVID and the, and the significant amounts of, um, uh, new direct to consumer options that were available. We saw a little bit higher of a price compression than what we had in previous years. And so I think that's starting to normalize. You know, we can model in, you know, 15 to 20% price compression generally. And, you know, we feel pretty comfortable with that within our 22 guidance, and that being offset by significant continued growth with, you know, primarily those 18 of the top 20 customers.

Yeah, and one other thing I would add about pricing, and I alluded to this a couple quarters ago, when we built our plan this year, where we had clients that would have a material impact on us if price were to change. We actually had conversations with them and tried to bake in to the best extent we can any anticipation we have in the plan that we put into guidance. So to the best of our ability, we're trying to make pricing a non-factor in the conversations. It's a normal course of our business that we have to manage proactively and not have it be an event for us. And I think we've done a good job of that this year, getting into the year.

Great. And then just maybe just strategically around know as you highlight the value of the edge network um how do you bring more developers into the fold in terms of getting them on your platform and the applications are providing yeah there's a couple things we're doing there and that's a really important um part of our strategy in fact we have a person dedicated to driving that strategy in the company wakes up every day focus on that

And there's a couple of things that we're doing. Number one, making sure that we are pre-integrated with a number of the development frameworks that they use. And so we have today 40 different frameworks that we're integrated with. Our leading competitor is half of that. So we're pretty excited about that. And that just makes it easy out of the box. Secondly, there are a handful of open source tools that really dominate the market. And we are making sure that we contribute to those and that our tools are pre-integrated out of the box so that when people use those, They essentially just extend right into our capabilities seamlessly with that. And so that's a part of what we're doing. So basically, we're just embracing their communities and their ecosystem and the way they work and making sure that our tools resonate. And then, of course, training and PR and stuff like that as well. But it's largely getting to where they are in their communities and with their tools and their ecosystem.

Great. Thanks. Thank you.

Thank you, Mr. Breen. The next question is from the line of Jeff Van Ruffery with Craig Hallam. You may proceed.

Great. Thank you. Congrats, guys. Real nice numbers here. A number of questions for me. Bob, on the sales side, it sounds like the hiring has gone very well, and you said you may hit your target a quarter early by the end of Q1. What's the catalyst, and how are you considering or thinking about the next tranche of sales hiring? What do you need to see? How do you think about that?

Yeah, I think so the way we're doing it is, you know, we built a plan that we wanted to get to a certain capacity that will support the numbers in, you know, we built an asymmetric plan. So there's probably a 70% chance of overachieving the plan and a 30% chance of underachieving the plan. And we wanted to build the sales capacity to match that, you know, risk profile. And so we'll get to that at the end of Q1, which is a quarter ahead of where we expected. And then we're going to kind of digest that. Give us a chance to really prove those numbers out. And then if we see the productivity that we expect to see, we can go back and look to do that again. But we really plan the company in 90-day sprints right now. And so we'll continue monitoring that. We're really happy with the caliber of people we're getting. I think people really love the story and are buying into the strategy. And it's a great place for a salesperson to be with a product they really know they can sell. So but, you know, you want to take a step forward, measure, observe, make any adjustments and then take your next big step. So as we get to the next quarter, we'll probably have more information about how that's working and what our steps going forward are and where we want to press forward. Our goal, quite frankly, is to be able to have a conversation and say, hey, you know what, we're going to spend some of our EBITDA on expanding our sales because we're doing so well with it. But we'd like to actually have that success under our belt before we actually have that conversation.

Fair enough. Gross margin was quite a bit ahead of me this quarter, Dan. How do you think about that playing as we kind of chunk through the quarters in this fiscal?

Yeah, I mean, we're very pleased with the gross margin improvement, you know, quarter over quarter. That's the second consecutive quarter that had significant momentum in that line. Utilization, as we've been talking about, is a key driver. And so that is a key driver in the quarter. As we head into next year, we continue to see gross margin expansion as we get the full-year benefit of some of these cost savings that we've implemented, as well as continued growth within the Layer 0 product line that we get better margins on than the existing core CDM business, given the asset-light SaaS platform. revenue stream that, that, that relates. And so, you know, we're, we're estimating another four to 500 basis points of margin improvement, you know, going into 22, you know, based on that, that diversification of the product offering, as well as, you know, continued realization of, of our cost savings as we go throughout the year.

That's helpful. I think, Bob, you mentioned security is coming. You're pretty fast and furious, I guess, with the new launches and introductions. Can you level set expectations? What kind of impact do you think security can have to the margins, revenues? Just how do you level set it?

Yeah, so there's a couple ways we're thinking about security. I think initially it's really making sure that all of our products, particularly App Box and our CDN, has security. Very robust, you know, native security. As I talked about before, it's like having seatbelts and airbags in your car. You kind of expect it. And then the second phase of that is where we can really start to robustly go out and sell security as an enterprise solution. Both of those are on the slate for this year. And so you'll see some announcements here in the next, you know, next few weeks, this quarter for sure. But we'll do our first big release around security. And then probably every quarter after that, you'll start to see meaningful announcements around that. And we're looking both organically as well as inorganically as well.

Yeah. Okay. And last for me that you referenced and I missed it earlier in the call, something about supply chain. Can you just revisit that? Supply chain headwinds?

Yeah. So where the supply chain impacts us is getting hardware, servers. Whether it's on our CDN network or whether we need it for our Edge Extend product, we had a number of deals that we could have closed in Q4 and Q3 for that matter. But we're really managing that. There's a huge backlog with servers. And so we're not, everybody's challenged with that. We're navigating through that and we've got to balance, uh, you know, deals that we can close versus capacity we need for peak time in December. And so we did a pretty good job in December, but we definitely left some deals on the table because of that. And, uh, we'll pick them up in the next few quarters. And that's just something that we're all dealing with. It's the industry where we are right now. We have deep relationships. We're a big buyer. And so we've been able to navigate that pretty successfully. And we anticipate we still will. But it does sometimes force us to have deals slide into the next quarter that we didn't expect to.

Yeah. Yeah. Okay. Yeah. Real nice progress here, guys. Thanks for taking the questions. Appreciate it.

Thank you.

Thank you, Mr. Zanreferi. The next question is from the line of Brett Feldman with Goldman Sachs. You may proceed.

Great. Thanks for taking the question. So you obviously are expecting some solid growth from the Layer 0 acquisition this year. I was curious if you could give us a little more insight into the visibility. In other words, how much of that forecast do you already see in the funnel? And I'd also be interested in an understanding of the growth that you're expecting To what extent is that leveraging the combination of their existing capabilities with your CDN? In other words, you're selling a solution, you expect to sell solutions that are capitalizing on both of them, or is it still just really the funnel and the capabilities that Layer Zero came in with such that you would still have all that incremental upside as you further integrate the business?

Yeah, thanks, Brett. We feel really good about the visibility into the revenue projections going into 22. Their product is something that customers go out and buy versus the opposite where we have to go and sell and have our salespeople in front of their technology people to sell it. Like this is a product that people come to buy. And that's evidenced in as well as the partnership with Layer Zero coming into Limelight. We closed a significant opportunity with a well-known large consumer product company that we wouldn't be able to have, we wouldn't have gotten on our own with Limelight And I don't know if layer zero would have gotten on their own. And so the partnership of the two companies coming together and offering an integrated product with the CDN product attached to it gives us the confidence that the $20 million number that we're putting out there for 22 is achievable with some upside there. So we feel really good about that acquisition and the technology that it brings to the platform.

Yeah, Brett, the way I would think about it is there's really kind of three broad sets of capabilities that we need to have to really play at the full value. One is obviously the Edge Network, which we've addressed this past year. The second is the Layer Zero JAMstack capabilities, which we also addressed. So those two things are fully integrated, and we get the full value out of both of those solutions. And it is a one plus one equals four story. But in addition to that, security is also part of that conversation. That's why we're really focused on that. And the announcements that we'll have here this quarter will really shore up that part of it, you know, that third leg of the stool, if you will. and then we'll continue building on all three of those things.

Great, thank you.

Thank you.

Thank you, Mr. Feldman. The next question is from the line of Eric Martinuzzi with Lake Street Capital. You may proceed.

Hey, congrats on the quarter and really liked the 2022 guide there. I did have a question about seasonality. Not sure if I missed it or not, but historically, and I know history is a little bit distorted here between COVID and the company's own issues, but we would have seen about a sequential step down about 10% or so between Q4 revenue and Q1 revenue. Does that still hold true given all the other puts and takes that we've experienced here over the last 18 months?

Yeah, thanks, Eric. I think you're right on that number, and that's what That's what we're projecting. And then for progression throughout 22, we expect as we continue to build the pipeline of the Layer 0 product and as we continue to make performance improvements and continue to gain the growth with those larger direct-to-consumer streaming products on the CDN side, We feel that there's progression throughout the year, and as we continue to build on the SaaS-type revenue stream that the Layer 0 platform provides us, then that seasonality will become a little more muted. But where we're at right now is I think 10% is a good number going into Q1. Okay.

Okay. And then one other question. I took a look at the capex that you spent for the year, the $15.8 million, and then looking at your forecast for 2022, looks like roughly $7 million at the midpoint, incremental spend. Where are you pointing those incremental capex dollars in 2022 versus 2021? Yeah, I would say that.

two major areas. We want to improve our caching capabilities and increase that because when we're able to store more content closer to the end users, that just provides better performance, more reliability. And so we're looking at new servers that will increase those capabilities for us. And then I would say the other item is we're looking at transitioning our operating system from its current free BSD base to a Linux base, and that's gonna require some CapEx spend as well. And so we're looking at that and building that into the forecast. That'll lead to the incremental dollars that we're spending in 22.

And Eric, just to put some color in that, that incremental spend, give you some dimensions. The cashing that Dan talked about, you know, we've identified opportunities where, you know, you're seeing, you know, less than 12 month paybacks on that capex. So it's a very good IRR, very good return. And then on the Linux That's where we get that 30% productivity lift that we referenced. That'll obviously hit the gross margin line. And we're really focused on gross margins. We think that's an important thing to fix. And so, you know, that's where that additional capex goes. The one will drive revenue and the other one will drive gross margins.

I understand. Thanks. That covers it for me. Great. Thanks.

Thank you, Mr. Martinuzzi. The next question is from the line of Rudy Kessinger with DA Davidson. You may proceed.

Hey guys, thanks for taking my question. Dan, if I go back to Eric's question, if we assume a 10% step down from Q4 to Q1, it would clearly imply kind of several million of growth sequentially from Q1 to Q2 to Q3, which are historically seasonally tough quarters just with traffic trends, et cetera. And so what gives you conviction um, you know, even excluding layer zero, which might grow sequentially without the seasonality, but what gives you conviction that in the core CDM business, you know, you guys could grow in those historically tough quarters.

Yeah. Walking through the math. Um, so with that 20 million guide that we have on layer zero, uh, you know, built into the numbers, um, you know, we're guiding to somewhere in the neighborhood of, of three to 8% growth, uh, on the core CDN business. And I think, um, With the progress that we're seeing on performance, and we did see growth in the largest of 18 of our top 20 customers, and that's been consistent over the last several quarters as we've worked our way out of this drop that we came into the year with.

um that those those couple items give us the the confidence that um that sequential growth quarter over quarter is achievable and then kind of um you know maybe with those 18 top 20 customers i guess with customers we've spoken to they'll kind of look at you guys and the other cdns out there and they'll first start with you know your capacity that you have available and then allocate traffic based on your performance but keeping that ceiling based on your capacity I guess with those 18 of the top 20 that you've been growing 20% year-over-year with the last couple quarters, are you coming anywhere close to kind of your ceiling with those customers based on your capacity, or do you still see plenty of runway to continue gaining share with them?

Yeah, I think there's a couple things to think about there. I think when you talk about capacity, there's overall network capacity, which is how we've traditionally thought about it. But the other capacity is things like cash. And cash is really what drives performance. When somebody has a big library, you know, the more that library we can get closer to the end user, the better the performance is going to be. And that's why we're making those investments we talked about in CapEx around cash. So we look at capacity. We're looking at our cash capacity. We're making investments there. That's actually going to have a much better improvement in performance and, you know, in revenue than gross capacity. But gross capacity also, when we do the architectural improvements, You know, we think we'll get a 30 percent lift in capacity and the existing, you know, footprint that we have. And so, you know, to your point, when you have the performance improvements with the cash combined with the additional capacity, we should see the revenue come in. We're also improving the utilization overall. We highlighted that we went from, you know, middle teens to approaching 20. We think we can get past that, particularly when we're doing off-peak things, which we're starting to sell a lot more of now as well. So those three things combined. allows us to get the growth without having to go crazy on capacity, just manage our capacity better and make expansions where it's appropriate.

And then just lastly, because I guess on security, certainly some of your competitors have had some security products out there for a while. So just how do you think about this stage coming out with security products that are differentiated and maybe have some advantages versus your peers?

Yeah, I think generally the way to think about it is, you know, security historically has been very perimeter oriented. When you have all your assets sitting in a data center or in a corporation, you know, you build a big motor around those and, and with everything moving to a distributed world with cloud and SAS and microservices, and now people working virtually, That model has a lot of challenges. And so while a lot of our competitors have been in security for a long time, I think where security is going is quite a bit different than where it has been. And so we have the opportunity to come in at a point where there's, quite frankly, a big inflection point in the security industry. So we have to do those perimeter things, which we're doing. But we have some ideas of where we can really differentiate in, you know, an edge-based era, a cloud-based era, where we can really excel, particularly when you combine it with our app ops solutions. I would expect that much like we did last year, we'll come out sometime mid-year this year and have a deep strategic conversation, analyst day, if you will, and we'll cover things like security in more depth when we have all of our story buttoned up there and have a little bit more to talk about. But we do feel confident we can be relevant in that space.

Thank you, Mr. Kessinger.

The next question is from the line of Frank Lowtham with Raymond James. You may proceed.

Great. Thank you. Back to the CapEx, if you hit the higher end of your range of guidance, what would that translate to in terms of new growth or would it be more acceleration of the projects that you have underway?

Yeah, I would say that it's primarily related to the project that we highlighted with cash and the transformation of the operating system to Linux. But with those, as Bob mentioned, one, the Linux is designed to improve throughput, which will drive gross margin. and the caching will improve our performance. We've done some trials with several POPs of the footprint that we're moving toward, and it had very favorable outcome, which is leading us to the expectation that, as Bob mentioned, that ROI on that equipment is less than a year to turn that around. And so we feel really good about those opportunities and expanding both the top line as well as the margin line through that CapEx.

Great. And I apologize if you addressed this earlier in the call, but I missed it. Walk us through where you are with getting some of the layers here of software engineers and automating some of the legacy limelight network and And can you translate that into any of that 400 to 500 basis points of margin benefit that you're talking about being able to achieve?

Yeah. So we're fully integrated now. The Layer Zero team is fully integrated. It's all one team. Ajay is our CTO, and his engineers are embedded with our development and product teams. And there are a couple of different pieces. And Ajay has been very focused on how we can improve the revenue and performance and gross margins. And there's a couple areas. You hit on one, automation. So you'll start seeing, you know, starting this quarter and second quarter, we're going to start to be very aggressive with automation. They're already working on things, have stuff in kind of testing and pilots. We'll roll that out. And then, you know, obviously we talked about the caching and we talked about the Linux upgrades and all those things, you know, are really also part and parcel with some of the skills we picked up combined with our infrastructure team. You know, really the beauty of that integration We gained a significant amount of software skills combined with our significant infrastructure and scale skills, and together they've really been able to figure out ways to be much more efficient as a company. But to answer your question, that's happening now, and you'll start to see those improvements. We actually have improvements every quarter built into the plan based on that automation.

All right. That sounds great. Thank you.

Thank you, Mr. Louthen. There are no additional questions waiting at this time, so I'll pass the call over to Bob Lyons for any additional remarks.

Thank you, operator, and thank you, everyone, for joining us today. We look forward to communicating our progress and continuing our transparent conversation with analysts and investors. We wish you good health and happiness in the new year. Thank you.

That concludes today's call. Thank you for your participation. You may now disconnect your line.