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spk01: Good day, ladies and gentlemen. Welcome to the Limelight Network's 2022 First Quarter Financial Results Conference call. At this time, all participants are in a listen-only mode. At the end of the prepared remarks, we will provide instructions for those interested in entering the queue for the question and answer session. I'll now turn the call over to Sumit Sinha, Vice President of Investor Relations and Corporate Development.
spk07: Good afternoon. Thank you for joining the Limelight Network's first quarter 2022 financial results conference call. The call is being recorded today, April 28, 2022, and will be archived on our website for approximately 10 days. Let me start by quickly covering the safe harbor. We'd like to remind everyone that we will be making forward-looking statements on this call. 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, product and feature functionalities, pro forma results, acquisition activities, and contributions from acquired businesses. Actual results could differ materially from those contemplated by a forward-looking statement, and reported results should not be considered as an indication of future performance. For more information, please refer to the risk factors discussed in our periodic filings, including our most recent annual Form 10-K and quarterly reports Form 10-Q. The forward-looking statements on this call are based on information available to us as of today's date, and we disclaim any obligation to update any forward-looking statements except as required by law. Joining me on the call today are Bob Lyons, our President and CEO, and Dan Bonsell, EVP and CFO. Bob will start today's call with a brief discussion of the results and an update on our improved, expanded, and extended 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, where Ajay Kapoor, Limelight CTO, will also be available to answer your questions. I will now turn the call over to Bob.
spk05: Thank you, Samit, and welcome, everyone. The first quarter of 2022 continued to build on our positive momentum with three sequential quarters of profitability improvement and two sequential quarters of double-digit year-over-year revenue growth. Our operational improvements and renewed client focus have driven record traffic with 17 of LimeLight's top 20 highest all-time traffic days landing in the quarter. It is also important to note that the traffic improvements were broad-based in nature, spanning streaming, live events, software downloads, gaming, and spanned our diverse client base. In Q1, our financial results were well ahead of market expectations, as well as ahead of our management plan. Revenue was $58 million, an improvement of 13% year-over-year and well ahead of plan. Our cash gross margin of 40.2% was up 420 basis points year over year and consistent with our plan. Adjusted EBITDA was $2 million ahead of plan for the quarter and a meaningful $5.3 million improvement year over year. I can comfortably state today that our business continues to strengthen and we remain confident in our ability to continuously create meaningful value for our clients, shareholders, and employees alike. The underlying pillars supporting this momentum are threefold. First, our unwavering commitment to operational performance. As previously reported, third-party load balancing and data analytics firm PerpOps continues to rate Limelight's performance as best in class. Last quarter, we reported that we were number one in North America. Building on that, we have worked very hard to improve our standing in other regions as well. We have made notable progress in Latin America, a critical marker for us. Our efforts have resulted in achieving the number one rating in that region as well. As a result of almost a year of dedicated performance improvements, we can now proudly and confidently state that we consistently rank number one in the world. The performance of our network is critical to our success, and we will continue to be unwavering in our pursuit to consistently deliver best in class performance. Second, our commitment to delivering an unmatched client experience. In the many conversations I have with clients each quarter, I am frequently told that one of our towering strengths is our team and their focus on delivering great support. This is something that separates us from the pack, and we intend to continue building on that strength. Third, our strategic pivot has extended our ability to deliver high-growth, high-margin, edge-enabled application and security solutions. With Layer Zero, we added meaningful capabilities, products, and solutions to our edge platform. We now have what we believe to be the most complete app ops solution for developers who are focused on improving performance, protection, and productivity of their web applications by migrating them to an edge-enabled next-generation platform. And the market agrees. We replaced direct competitors in nine of our new logo deals this quarter. Our commitment to continuously improving across these three pillars results in more confidence and deeper relationships with our clients. With that confidence, they are more inclined to turn their traffic dial towards us and evaluate our high margin products. That in turn drives more traffic to our platform, improving our utilization and creating opportunities to deliver additional SaaS-like solutions. This all translates into a company that can sustainably and continuously create additional value for our clients and shareholders. In short, our recent success in creating shareholder value has been the direct result of addressing the performance, support, and app modernization needs of our clients. We will continue making them our first priority. They pay for that and should expect nothing less. Let me shift focus and share some detail around what we have done and plan on doing in the months and quarters ahead. I will frame my comments using our Improve, Expand, and Extend framework, as I have done in previous updates. As a reminder, our Improve program is focused on network performance and operating costs. Our Expand program is focused on client experience and the expanding relationships with them. And our Extend program is focused on introducing new best-in-class edge-enabled solutions that increase network utilization, growth, and gross margins. Let me highlight some of the things that we have focused on to continue building on our recent momentum. Under our improved program, we continue to make operational and architectural improvements toward improving performance and reducing our cost footprint. Improved highlights include last quarter, we introduced an initiative to upgrade our network to a Linux-based operating system. This initiative will improve throughput, increase capacity, and reduce operating costs. We are on track with this initiative and expect to see incremental improvements each quarter going forward. Further, this initiative accelerates our ability to pursue an asset-light model with ISPs and more rapidly consolidate the edgecast and limelight platforms as a service. We began executing a plan to increase our cash capacity and bandwidth capacity by over 40%, which will meaningfully improve our performance and allow us to gain more wallet share with existing clients and earn the business of new ones. We continue to focus on network utilization by improving traffic mix and traffic management. We have maintained our improved utilization levels achieved in the fourth quarter of 2021, despite seasonality trends in Q1. As a reminder, every point of utilization results in $5 to $9 million of adjusted EBITDA. Last, the year-over-year flow-through of revenue growth to adjusted EBITDA is approximately 77%. Highlights this quarter for our EXPAND program include, we previously discussed that two of our top 20 clients had not been growing and were flat in our annual plan. I am happy to report that both have delivered traffic above plan in Q1. Our largest client is starting to see the COVID-induced shortage of new content subside. In the quarter, they had a number of popular launches and anticipate many more in the second half of the year. Additionally, they continue to expand their focus on live content such as sports. Improving on the trends from previous quarters, 19 of our top 20 customers grew their revenue by more than 20% year over year. Client additions continue to trend in a positive direction with a five-quarter high achieved this quarter. In the quarter, we added 24 new logos, 15 of which were in the Americas. Of those, 60% were sourced and closed by our newly created channel team who are largely focused on AppOps. Of the new product sales, nine replaced direct competitors in this quarter. Our pipeline continues to grow as well. In the quarter, we grew our pipeline by more than 30%, with the AppOps portion growing by triple digits. 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 that are looking for the best solution for their high stakes web applications. Layer Zero contributed $3.8 million in the quarter and is tracking well towards its full year guide of at least $20 million in high growth, high gross margin revenue. We have largely completed the planned rebuild of our sales and marketing teams. The second quarter will be the first full quarter for most of our quota-carrying reps, providing ample opportunity for continued momentum in the second half of the year. Our extend program was rich with headlines this quarter. We announced the transformational acquisition of Edgecast. Without question, we have taken another giant leap forward in our strategy to become a leading edge-enabled solutions company. With Edgecast, we will be one of the largest independent edge platforms with a significant increase in scale security, live events, and video capabilities. We strengthen our security capabilities with native WAF, DDoS, and basic bot detection. This coupled with our November app CDN launch enables us to lead the rapidly growing 4.4 billion web CDN and security market. With these newly added capabilities, we have increased the size of clients we can target and our reach across industries. Our edge-enabled platform will include edgecast enterprise-grade security solutions, the fastest edge logic in the market relative to our direct competitors, our developer and JAMstack APIs, and application operational tools, all seamlessly integrated with the world's most performant global edge platform. Oh, and by the way, this comprehensive set of capabilities are already integrated with over 40 of the most popular web development frameworks. We believe that the robustness of our solution platform and holistic and integrated approach to edge and cloud services will quickly be recognized as the most complete solution in the market, especially as developers continue to govern purchase decisions in our market. The evolution from a media CDN to an edge-enabled solutions company, anchored by the industry's most complete app-op solution and powered by the world's fastest edge network, has and will continue to build positive momentum in our business. The momentum and leading indicators underrated business that continues to strengthen. We are seeing organic revenue growth, improving gross margins, and growing adjusted EBITDA. While we have made meaningful progress in the past five quarters and have seen three quarters of positive momentum, much work remains to be done. Our combination with EDGECAST provides us with a rich set of opportunities for improved growth and profitability. We will continue to focus on the basics, client experience, operational discipline, and focusing our strategic investments into solutions where we can establish a clear right to win. Under the soon-to-be Egeo banner, we will be a growing technology solutions company with a $40 billion total addressable market, the most complete app ops solutions, all running on the world's most performant edge platform. I don't think it's too much of a stretch to say that the future of Egeo looks very bright. At this time, I will turn the call over to Dan to report first quarter financials.
spk12: Thanks, Bob. Revenue for the first quarter was $58 million, up 13% from the first quarter of 2021, and our second consecutive quarter of double-digit percentage revenue growth over the prior year. Layer 0 contributed $3.8 million to our revenue, which when excluded implies 6% organic growth in the quarter, which is two consecutive quarters of single-digit organic growth. We delivered this performance despite global supply chain headwinds, which we have modeled to continue. Our top 20 clients accounted for approximately 76% of total first quarter revenue compared to 79% last year. Cash growth margins expanded to 40.2% from 36% in the first quarter of 2021, an increase of 420 basis points due to revenue growth driven by higher traffic and improving utilization of our network. Total cash operating expenses were $27.1 million in the first quarter of 2022, or 46.8% of revenue, down from 65.1% of revenue in the first quarter of 2021. Cash operating expenses, excluding restructuring and acquisition-related expenses, were $21.3 million, or 36.8% of revenue, down from 42.3% last year. We continue to realize the benefits from our improved management of operating costs. As previously mentioned, we had continued to invest in sales and marketing and hired ahead of plan given our ability to attract qualified talent. Acquisition and legal related charges in connection with our proposed acquisition of EDGCAS were $5.1 million for the first quarter. The aforementioned year-over-year revenue growth and improvements within our operating model resulted in a meaningful year-over-year increase in adjusted EBITDA. First quarter 2022 adjusted EBITDA was $2 million, up from a loss of $3.3 million last year. Improved network utilization and operating leverage in the business allowed for 77% flow through of the revenue growth. Cash and marketable securities total $62 million, a decrease of $17 million. We spent $5.4 million for capital expenditures. DSO at the end of the quarter was 81 days compared to 51 days at the end of December. The increase is due to the timing of client payments received. Our accounts receivable balance increased $12.8 million from the end of December. We expect DSO to be in the 50 to 60 day range and have seen improved cash collections in April. As for guidance, given we anticipate closing of the EDGCAST transaction in the next 30 to 60 days, we are maintaining our full year guidance. We expect to begin working with the EDGCAST team on a bottom-up forecast for the remainder of the year immediately after we close. and we'll provide combined guidance for the year as soon as we finish that process. We expect second quarter to be consistent with the first quarter. With continued tight management of network and operating expenses, we would expect gross margin adjusted even a margin to continue its methodical expansion. To reiterate how we think about the combined company post-integration and upon successful completion of these synergies initiatives, which will take 24 months from close, the combined company is anticipated to have growth rate of approximately 10% to 15% better than 50% gross margins, improving to 60%, approximately 10% to 15% adjusted EBITDA, and positive free cash flow. With that, I will turn the call back to Bob.
spk05: Thanks, Dan. Let me take this opportunity to outline the next phase of our transformative story that begins with a company rebrand to Egeo. On a combined basis, Egeo will have one of the largest networks in the world delivering more than 200 terabytes per second across more than 300 global POPs and 2021 revenue is exceeding $500 million. Our scale will enable us to improve our gross margins to approximately 60% over the next two years, underwritten with an improved platform utilization, growing high margin revenue, and planned net operational synergies of greater than $50 million. With our new capabilities, we will be recognized as having the most complete web application platform with a 5X increase in market share to over $100 million in high growth, high margin application and security revenue. The addition of Edgecast's industry-leading Edge video platform further diversifies our revenue and the solutions that we can deliver from our Edge platform. As a result, we will reduce client concentration risk, and our largest client will be less than 13% of total revenue, the only one above 10%. To put a fine point on the complementary nature of the businesses coming together, Limelight has significant international presence, expertise in large cloud delivery, a growing sales and marketing team with proven client success practices, a leading and high growth app ops platform, superior video on demand capabilities, all delivered on the world's best performing edge platform. With Edgecast, we add a proven channel program supported by partners such as Azure and Verizon, industry leading live event capabilities, a multi-layered edge security platform that includes scaled WAF, DDoS, and bot management, a highly synergistic edge video platform, Linux-based CDN capabilities that will immediately improve automation and a team of highly skilled employees. After close, we will have the ability to dig deeper and anticipate the ability to capture additional client and commercial synergies. Integration planning is well underway, and we expect to close this acquisition and start this exciting next phase of our transformation in the next 30 to 60 days under the Egeo brand. 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 the lines for the question and answer session.
spk01: Thank you. If you would like to ask a question, please dial star followed by one on your telephone keypad now. And if you change your mind, please dial star followed by two. When preparing to ask your question, please ensure that your phone is unmuted locally. And our first question is from Michael Elias from Cohen & Co. Michael, your line is now open. Please proceed.
spk06: Hi. Thanks for taking the question. Two, if I may. So first, in your recent proxy, you provided management expectations for the combined company. And I believe the growth rates for revenue are essentially between the 9% and 11% range between 2023 and 2028. And I know you've talked about 10% to 15% revenue growth and then potentially getting to 20% to 25%. I just want to know from your perspective, what are the levers to getting to the higher end of that range? That's my first question. And then the second question would be, I believe your 2022 guidance implies that traffic with two of the top 20 customers is essentially flat year over year. And I believe earlier you were talking about how you're seeing improved progress in terms of traffic. You know, just wondering, you know, what you're seeing there, and then also, you know, how we should think about the standalone guidance throughout the year as a result of that. Thank you.
spk05: Yeah. Hey, Michael, how you doing? It's Bob. I'll start with your second question first on the traffic. You know, we obviously are seeing a lot of traffic, and as we mentioned in the call script, we had 17 of the top 20 days historically in the last quarter, and so we're pretty excited about that. In fact, those 2 customers that you mentioned, 1 of those was up 20% this quarter as well. So we're seeing growth there again. Both of them grew by the way. So we're pretty excited about that. So, from a standpoint of how the business is running, we're very happy with that. The challenge that we have is, you know, in our business, you have to build capacity to be able to continue that momentum. And we're seeing a lot of supply chain disruption takes us 9 to 12 months to get servers. And so we had a lot of conversation internally about, hey, do we raise guidance or do we stay flat? And I think given the fact that we're going to have a major, you know, reset of guidance in the next, you know, 90 days, let's say, with the merger with Edgecast. In addition to that, I'm continuing to watch the supply chain challenges. We just thought, you know, it's better just to kind of hold tight and come back and reset that in a short period of time. But having said all that, you know, we're navigating those challenges, doing it very well, have done it, and we're very happy with where the business is running. from a traffic standpoint. On the growth standpoint from Edgecast, that's a great conversation. When you look at the business, Edgecast has been tucked into this huge Verizon company, didn't have a sales force of its own, really relied on the Verizon channel. And so when you look at those growth rates, those growth rates are despite the fact that they really had no commercial presence for most of their products. They didn't have a great go-to-market strategy, didn't really even have a sales team per se. And so when you take the capabilities that they have, the security, the app CDN, and the video platform, and you put them into the redesigned model that we spent the last 12 months rebuilding, we expect to see much more growth than what they've been able to do. So it's pretty interesting. They have pretty favorable growth despite the fact really having no commercial presence or capabilities in the organization other than relying on. on Verizon to sell stuff for them. So that's how you get to the upper end. I think the other thing we have to continue to do is launch products in other areas like security, which will continue to push that growth rate up. Awesome. Thank you. Thank you.
spk01: Thank you, Michael. Our next question is from Frank Latham from Raymond James. Frank, your line is now open. Please proceed.
spk13: Great. Thank you. Talk to us a little bit more about Edgecast and how that's going to help with the content delivery business. How does that help support that? And then give us, if you can give us an update on the Linux conversion and what sort of, what challenges the Edgecast integration will bring to that as well. That'd be great. Thanks.
spk05: Yeah. Thanks, Frank. So a couple of things, I think one, when you look at our video delivery business, we're very strong in VOD, you know, over the top video streaming. They do much more in live events. Actually, I'd argue they're probably best in class at live events. That's an area where we're pretty weak, actually. So you put the two combinations together, and essentially you have the ability to span this full spectrum of live events to video on demand. With their video platform, they also have a best-in-class ad insertion engine that will position us well for what we think is another growth area on the horizon, which is advertising-driven video on demand, AVOD. And so we're pretty excited about that. So, from a capability standpoint, they're very complimentary. But the addition of that is going back to the answer I gave to Michael, you know, capacity and throughput is something that's really important to us. When you combine the networks, one of the things that we've learned, we did a pilot and we found out that when we go to Linux, we can actually improve our capacity and our throughput without having to add hardware. And so that's one of the ways that we can actually expand our capacity without having to take the headwinds of the supply chain disruption head on. When we merge the two networks together and bring the companies together, they have a lot of access capacity. They're already running on Linux as well, and so we're going to bring a lot of expertise over. We're in the early stages of our rollout of that, and we'll be able to accelerate that with the combination of their expertise, their network, and our network. So we'll be able to do that. In addition, they also are far ahead of us in automation because of that Linux platform. And so essentially, by combining the networks, we'll bring excess capacity to the table. We'll be able to accelerate our Linux-based transformation and also accelerate the automation, which all translates into higher revenue and higher gross margins.
spk13: All right, great. Thank you.
spk01: Thank you. And our next question is from James Breen from William Blair. James, your line is now open if you'd like to proceed.
spk11: Thanks for taking the question. Just a couple on the security side, are the products that you have now sufficient to sort of grow from here, or do you need to gain more technology through acquisition or through development internally? And then secondly, just can you comment on any impact you've seen just from what's going on in Ukraine relative to your business there? Thanks.
spk05: Yeah, sure. Thanks, James. Let me take the Ukraine piece, and I'll start the security piece. And then I actually have Aji on the call with us today, and I'll let him talk a little bit more about our thoughts around security. So, from the Ukraine piece, it's one of those stories where I feel guilty saying this, but we're actually doing really well. We have about 120 people in the Ukraine, largely focused on development and professional services. The professional services is really geared against the app ops and layer zero implementations. What I can tell you is that we've, as a company, done a lot to make sure that they're safe and have all the resources that they need. They're working really well. It's really a testament to the Ukraine people. It's really been amazing. So we have not seen any disruption there. We obviously continue to monitor that and watch that and do all the things that we can. It does govern us a little bit in our growth plans and making sure that we can expand the resources. It's hard to expand in the Ukraine, so we're looking at other regions to be able to expand those capabilities in that team. But as we said today, it's been working pretty well, obviously, day to day, though. And so we continue to watch that. On the security front, You know, we pick up a lot of capabilities. We had to launch ourself in January of this year. We also pick up a lot of capabilities with Edgecast. And as I've said in previous calls, you know, we continue to be inquisitive there and have some pretty, you know, big ideas about what we can do there, but we're going to be thoughtful and patient. Let me turn it over to Ajay, and he can talk about some of the stuff that we're doing with security today, and then maybe I'll follow up with some of the stuff we're looking at as we look forward.
spk09: Yeah, thank you, Bob. And thanks for the question there, James. Just quickly on Ukraine, I just want to add a little bit there as one of the managers that works with the teams there. They're an incredibly resilient group here who has met all of their deliverables for the first quarter, which is really incredible and really enjoy the fact that the company is supportive of what they're doing and that they then are able to be employed and pay taxes and support their employees. as a result of that. So it's just been incredible to watch their resilience and what they've been able to do. On the first question of growth, you know, I think what you asked is, hey, is there a need for further acquisition to be able to get to the kind of growth rate that Bob spoke about just a second before? And, you know, through the work of EdgeCast and Layer Zero, we have everything we need to support those growth rates. But we will always be open to synergistic acquisitions like those, especially in the area of security and enterprise security in particular. But coming back to kind of your original question, the markets around web and API security are growing rapidly, double-digit growth, kind of the 20% range or north of that. Areas such as app ops are growing much, much faster than that from a small base. And then we believe on the core business, there are things that we can do that allow us to take share from incumbents, especially as a result of the increased scale and capacity that we have and through the acquisition of Edgecast, which will allow us to also grow that business at rates much faster than the market. So kind of the first answer here is that, yes, absolutely, with what we have and what we can do to optimize those businesses over the next couple of years we can achieve those growth rates, but we will always be looking for opportunities for further growth.
spk08: James Jensen, Great. Thanks.
spk01: Thank you, James. Our next question is from Mike Lattimore of Northland. Mike, your line is now open if you would like to proceed with your question.
spk03: Great. Thanks. So on the pipeline growth you guys highlighted, would you attribute that to the sales and marketing investments you've been making, or is it, you know, just a really healthy end mark here? I guess that would be one. And then can you give a little more insight just into the core traffic patterns you're seeing, you know, kind of how did February, March, April play out relative to January and some traffic patterns?
spk05: Yeah, so I'll take on the pipeline, and then I'll let Dan answer the traffic stuff. So, we're seeing robust pipeline growth in general. I think it's probably attributable to 3 things. I think 1st, and foremost, having a much clearer strategy and a well articulated value proposition. When you look at what we've done over the last 12 months, we essentially put together a best in class application platform that includes security. best-in-class development framework running on the world's most performing network. And, you know, you can't find that solution anywhere else. You've got to cobble it together. So that's number one. That really helps a lot. Number two, we have been ramping up the team. Q2 will be the first quarter when we have full staff of quota-carrying reps. We, you know, started in December and continued that through the first quarter. And so, obviously, the more capacity you have, that's going to build a pipeline as well. And then 3rd, I think we also redesign our demand gen capabilities. We hired a new team around demand gen and marketing and put new programs and really redesign that motion from bottom up. And we're starting to see the early stages of that production as well. So, when you look at our pipeline growth, it's growing at rates that we needed to grow to support the growth rates that we've been talking about. We're seeing it grow very significantly in the areas where we want to see it grow, which is an app ops and called non CDN. But we're also seeing it grow in CDN as well. And we're pretty happy with the diversity of the portfolio. It also includes both large and medium sized customers in different industries as well. I think the broad and security stories also help really accelerate the pipeline growth.
spk12: Yeah, and then I'll take the traffic question. When we came out of Q4, we were guiding to roughly 10%. seasonality number and in Q1 we didn't see that that dip that we were anticipating and so we're very happy about that and that's not only that that's a broad-based traffic improvement from where we had initially expected in the plan and so we continue to see strong off-peak traffic and and demand for that continues to increase As well as our core CDN and the streaming product that our customers are demanding in that normal traffic profile continues to be really strong as well as new content comes out. And we expect that to continue here throughout the remainder of the year and even grow in the back end.
spk08: Yeah, thanks.
spk01: Our next question is from the line of, sorry, Max Michaelis from Lake Street Capital. Max, please proceed with your question. Your line is open.
spk04: Hey, guys. Nice quarter. I just got two quick questions here. The first one is, are you guys having any large contracts up for renewal anytime recent? And then are you seeing any pricing pressures from these customers?
spk05: Yeah, I'll take that, Michael. We always have contracts up for renewal, and we're constantly having those conversations. As we've talked about in previous quarters, we've changed our approach from waiting for that to be an event to proactively having those conversations, so we continue to do that. There is always going to be pricing compression in this industry, so that's just a way of life. We're not seeing anything that concerns us or should be a surprise to us. We're just navigating that as we expect to navigate it and pretty consistent with how we forecasted and built in our plans any pricing compression.
spk04: Okay, thanks. And then just maybe a little more clarity on the profitability metrics of the adjusted EBITDA expected for Q2. I think the comments were a methodical expansion. Is that sequentially or is that year-over-year?
spk12: Yeah, I'll take that. Sequentially and year-over-year. You know, I think in Q2 we were about break-even in terms of adjusted EBITDA. And in Q1, obviously, we were 2 million positive, which was ahead of our plan. In the plan, we expect to continue to invest in sales and marketing and R&D as the plans are to really focus on the development of automation of the operation of our network. And so even with those continued investments, we expect to continue to expand adjusted EBITDA margins as our revenue grows sequentially throughout the year.
spk05: Yeah. Yeah, I also looked at it. You can imagine we're getting ready to close on this big transaction on more than double our revenue. So we're investing ahead of that as well to make sure that we can absorb that and manage that transaction pretty smoothly. All right. Perfect. Thanks, guys.
spk01: Our next question is from the line of Jeff Van Ree from Craig Hallam. Jeff, please proceed. Your line is now open.
spk10: Great. Thanks for taking my questions, guys. A couple from me. I think first, Bob, maybe as you look at the guide on the sequential basis as it relates to revenues, do you just talk through the puts and takes of the sequential Q2 being similar to Q1? I think you referenced supply chain issues. Maybe just expand a little bit more on that. Obviously, a lot of concerns around the Netflix OTT issues. numbers in general. And you'd offset, I guess, both of those with a pretty bullish commentary about, you know, pipeline and signings thus far. So just talk a bit about the puts and takes on revenue growth from Q1 to Q2.
spk05: Yeah, sure. Happy to do it. Thanks. You know, I guess in full transparency, I'll say that those of us from management on the call don't all agree with, you know, where we came out with guidance. I think there was a lot of really robust debate when we have a quarter like we did in the first quarter, it would be easy to assume that, hey, we should lean in and guide up. And we certainly could have had that conversation. But when you take that, one of the things I've always committed is that we'll be transparent and we'll be asymmetric in our risk and that we will have much more upside than downside risk. And so we really took that approach in this quarter. When you look at what really we're in front of, we had a Q1 where we had record traffic. Q2 is working the same way, and we continue to expand on that. And so the business is running very well, and we're very bullish on that. But at the same time, you know, we've got a transaction that we're getting ready to do. We've got supply chain disruption that we do have a backlog in equipment. We could add capacity and actually increase traffic tomorrow, but we can't get the equipment. And so that's a continually evolving conversation day by day. And so, you know, there's some uncertainty around that. You have obviously the economic factors with inflation, what that's going to do, you know, the geopolitical issues. So there's so many issues that we're navigating that we just kind of said, look, you know what, given all this and given we're going to come back in 60 to 90 days with a reset guidance with a completely different P&L from where we are today. You know, let's just make sure that everybody knows the business is running well. We're very happy with where it is. but give us 90 days and we'll come back and we'll reset and we'll have a better view of kind of all the dynamics that we're navigating. And we thought that was the more prudent thing to do, but to make sure that we double click on the fact that business is running well, we're very happy with where we are.
spk10: And just to expand on the OTT concerns around Netflix, I mean, can you talk to what your customers are telling you, you know, with COVID unlocks, et cetera, you know, just concerns people consume less. What are you, you can add some color to that.
spk05: Yeah, I appreciate that. You know, it's interesting with Netflix. Netflix is the only big client we don't have. And they do everything themselves. And so when they have subscribers decrease, that actually helps us. So it's interesting. You know, we saw the market react to Netflix. But actually, you know, my view of what's happening there is, you know, you have inflation. People are worried about how much it costs to fill their gas tank. And Netflix raised their prices. You shouldn't be surprised that people canceled, you know, five years ago, three years ago. the model was Netflix plus one in subscriptions. Now the average household has seven subscriptions and Netflix raised their prices. And people are saying, look, I really don't need seven subscriptions. I'm going to have less. So I'm going to pick the one that I'm going to cancel. And it shouldn't be a real surprise that that happened, in my opinion. But having said that, they're still watching movies. They're still watching content. They're just watching it in different places. And those different places happen to be customer of ours. So You know, it actually works in our favor and we're pretty happy. Perhaps that's a big part of why we're seeing record traffic. Who knows?
spk12: Yeah. Helpful. The other thing I'd add to that is a lot of our other customers that we believe Netflix subscribers are moving toward continue to expand internationally. And with our global scale and continue to increase capacity globally with the edgecast acquisition, we feel that as a tailwind for us as customers continue to that international expansion and reach of a global customer base.
spk10: Okay. And Bob, one other quick one for you on the sales side, obviously tough environment and hearing from almost everybody, they're falling short on sales hiring goals. It sounds like you met or possibly exceeded. Where did you end up in sales headcount? Where do you think you're going next 12 months?
spk05: Yeah, we're fully staffed at this point. And it's probably the first time since I've been at the company, we can say that for sure. So we're fully staffed. So Q2 will be the first quarter that we're fully staffed. We're very happy with the quality of the team that we hired as well. Some of them came from our competitors. So we're pretty happy with that. We have not had a hard time hiring. I think largely because people really like the story and like where we're going. Look, salespeople are coin operative. They want to make money. They want to sell things. And so if they believe in the product and they believe in the industry, you can attract them and And so far, you know, they really are excited about where we're going, what we're doing, and what they have to sell. And I think that story will only continue to get better. So we feel pretty good about that. And it's not just the salespeople, too. We've also redesigned all the motions around the salespeople, the sales operations, the sales support, the demand gen. And so, you know, we continually build, you know, when you have a pipeline that's growing, that also helps salespeople, you know, hit their numbers. And so, you know, all the things are coming together that we expected to come together. We just have to stay focused and keep executing the way we are.
spk10: Yeah, sure. Ajay, I wanted to take advantage of you being on here as well. As it relates to Layer 0, a couple of questions. I guess as it relates to developers and just awareness, both of your capabilities as well as capturing the developers on the platform, I know that's front and center in what you think about. So question one, just talk on progress in terms of capturing developers. And the second question is related to EdgeCast. How does that change your value proposition in the app ops world as you put the two platforms together?
spk09: Yeah, great question. We've been making great progress building awareness in the developer community. And it is only underscored and accelerated the kind of thesis we had that the buyer of the CDM is surely headed and with every quarter headed in the direction of shifting from kind of an operations purchaser to a developer and dev team purchaser. That's kind of a one way trend. It's an inevitable trend and we have far and away the best product to capitalize on that trend. Then you could couple that with edge cast, which brings kind of best in class web and API security. And we really have kind of elevated, uh, our solution set for websites and APIs to best in the industry. And it is a industry in which our market share is small. relative to the size of this market. It's a minimum of $4.4 billion market, not including some of the things that we expect to happen as a result of AppOps. And we have a small, small market share there and have really far and away the best product to be able to capitalize and grow rapidly. And with the sales team coming online, they are, to Bob's point, not only do we hire to plan, but they're being trained and being made effective very rapidly. One of the anecdotes Bob shared earlier You know, there was a team that wasn't around in Q4 that in Q1 on the channel side was able to represent, you know, a significant portion of the U.S. kind of sourced and closed deals. And that's an incredible kind of ramp up time that just speaks to kind of the way in which we're attacking the opportunity that we have here with the best in class product.
spk10: And you touched on it maybe a little bit there, but my second part as it relates to Layer Zero, just in terms of the bookings relative to expectations, other observations about bookings. And then from a revenue standpoint, Q1 to Q2, any seasonality? Just not clear how the Layer 0 revenues play seasonally as the quarters roll through the year.
spk09: That's a great question. On the second point, there isn't a ton of seasonality because it's more contracted and consistent in basis. So there's not much seasonality there. There may be slight seasonality as it relates to bookings, but that's – Generally, it's smoothed out because of the recurring nature of the kind of existing client base where it's sort of generally just growing. So that's, you know, to the question of seasonality. In terms of just in general on bookings, things are great. And, again, as Bob and Dan shared earlier, you know, we've got triple-digit growth in pipeline as it relates to the app ops arena. And that's, you know, not including some of the things that we're hearing about about the progress that's being made on all the CDN web security business that Edgecast does. So we're really looking forward to that as well.
spk10: And what are you displacing? Last one for me. What are you displacing?
spk09: That's a great question. So there were a minimum of nine direct displacements, and it is a combination of how it's a who's who of web CDN and web security vendors combined with up-and-comer private companies, with unicorn valuation. And it's a combination of those that are in the mix of at least nine that were direct replacements.
spk08: Wow. Great number. Okay. All right. Thank you.
spk01: Before we take our next question, I'd just like to remind everyone that if they'd like to ask a question, please dial star-1 on the telephone keypad. Our next question is from the line of Rudy Kessinger of DA Davidson. Rudy, your line is now open if you'd like to proceed.
spk02: Hey, thanks guys. Thanks for taking my questions. Going back to layer zero on that seasonality comment, you know, the 3.8 million in Q1 was a bit lower than I think I had expected to see. It was flat with Q4 at 3.8 million. And so to get to that 20 million for the year, I mean, it implies you've got to grow that business, you know, like 18 or 19% sequentially each of the next three quarters. I understand triple digit pipeline growth, but it seems like a pretty rapid, acceleration in that business? What gives you confidence to hit that number?
spk12: Yeah, I'll take that and then Bob and Ajay can chime in. You know, as we built out that Salesforce, that pipeline and the demand gen capabilities that we have in place, that triple digit growth and pipeline gives us confidence that we will convert that And the conversion time period on those types of deals is a little bit quicker than the historical or legacy CDN business, which you have to run through a trial process and get through the procurement piece versus the layer zero, which we believe is the best in class. product that developers are really looking forward to working with as quickly as possible, given the productivity and efficiency improvements that that product has. And so I think just the shortening of the conversion timeline into actual revenue gives us that confidence. And the fact that we've only had the Salesforce and DemandGen team in place for a really short period of time, and to see that growth in the pipeline is something that's very exciting for us.
spk05: Yeah, I think the other thing, too, is to bifurcate the conversation, separate bookings from revenues. So you mentioned the revenue number, Rudy. We have a bookings target that we have to hit every month, every quarter. We track it every week, actually, throughout the year. And when you get the bookings, obviously, then you have to convert that into revenue with the implementation. And we're actually on plan where we expect it to be in bookings to support the numbers that you talked about. And so you'll see that in the first quarter we had bookings. You'll see that translate into revenue the next quarter. Probably the biggest risk that we have there, we talked about earlier, is really making sure that we maintain the productivity we're seeing on the team in the Ukraine. And, you know, that's obviously a big part of turning bookings into revenue. And so, so far, we've been doing a great job. Credit to them. But that'll be the area that we probably are most closely monitoring.
spk02: Got it. And then just secondly for me, I think you said 24 gross new customer ads, nine direct takeaways from competitors. That's good to see. I think you said the highest. gross new customer ads in five quarters. On a net basis, though, customers, I think it was down like three quarter over quarter. When do you expect, I mean, Q2, is that kind of the inflection point with that being the first full quarter, having all those sales reps fully ramped where you think you'll start to actually see active customer count going up on a net basis?
spk12: Yeah, I think that would be an appropriate expectation. Actually, with our historical trends and customers, you know, having that net decline of three with specifically the increase of 24 new ads and where we're getting those ads is very positive for us. But I think Q2 would be an appropriate point of view for that trending back in the positive direction.
spk05: Yeah, I think if you look over the last five quarters and you were just to plot it out, you know, you go five quarters ago, we were having higher attrition and not adding customers. Every quarter we've gotten better and better at that. And I think it's fair to say that the inflection point is probably Q2. We're adding a lot more customers and losing less. And so I think that's the right expectation.
spk02: I got it. That's helpful. That's it for me. Thanks, guys.
spk01: Thank you, and as a reminder, please press star followed by one on your telephone keypad if you have a question. And I'll just leave a moment for any further questions to be registered. And it appears that we have no further questions being registered today, so we'll hand back to management for any further remarks.
spk05: Okay, thank you, Operator, and thank you, everyone, for joining us today. We look forward to sharing our progress and continuing our conversations with analysts and investors going forward. Have a great day. Thank you.
spk01: Thank you to all those who have joined us today. This concludes the call, and you may now disconnect your lines.
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