Limelight Networks may have won a medal for its role behind the scenes to keep NBCOlympics.com humming, but the company is still dwarfed by its largest rival Akamai. The big question: Does Limelight have enough headroom to gain meaningful share from Akamai?
Jason Perlow detailed how content delivery network provider Limelight was pivotal to the success of NBCOlympics.com. The punch line: NBC's sea of video didn't melt under demand because Limelight helped deliver the content without technically dealing with the Internet.
Back in late July of this year, NBC finally announced that Limelight would be the primary supplier of content caching services for the Olympics. Where Limelight differs from Akamai and why the Internet didn’t “melt” is quite simple — they are completely “off the cloud”. In other words, unlike Akamai and similar content caching providers, their system isn’t deployed over the public Internet.
Jason and I have been going back and forth about Limelight for about a week as he was building his post. The big question we kept coming back to was: Limelight who? Let the numbers do the talking:
$15.3 million, or 18 cents a share: Limelight Networks' second quarter loss. Excluding charges, Limelight reported a loss of 2 cents a share. The biggest one-time item was a set aside for potential damages in a litigation suit.
June 2006: The date that Akamai sued Limelight, which mentions the lawsuit most quarters. We'll let Limelight tell it. From its latest quarterly filing with the SEC:
In June 2006, Akamai Technologies, Inc., or Akamai, and the Massachusetts Institute of Technology, or MIT, filed a lawsuit against the Company in the U.S. District Court for the District of Massachusetts alleging that the Company was infringing two patents assigned to MIT and exclusively licensed by MIT to Akamai, U.S. Patent No. 6,553,413 (the 413 patent) and U.S. Patent No. 6,108,703 (the 703 patent). In September 2006, Akamai and MIT expanded their claims to assert infringement of a third, recently issued patent, U.S. Patent No. 7,103,645 (the 645 patent). In February 2008, a jury returned a verdict in this lawsuit, finding that the Company infringed four claims of the ‘703 patent at issue and rejecting the Company’s invalidity defenses for the period April 2005 through December 31, 2007. The jury awarded an aggregate of approximately $45.5 million which includes lost profits, reasonable royalties and price erosion damages. In addition the jury awarded pre-judgment interest which the Company estimates to be $2.6 million at December 31, 2007. The Company has recorded the aggregate $48.1 million as a provision for litigation as of December 31, 2007. A key determinant in our ability to estimate possible future charges is the extent to which we are able to determine a correlation between the jury awarded amount to the various elements of the allegations. For the three and six month periods ended June 30, 2008, the Company estimated its revenue from alleged infringing methods totaled approximately 36% and 46% of its total revenue.
Limelight is pursuing multiple legal options. That 36% figure is important because it's down from 54% in the first quarter. Simply put, Limelight is installing workarounds around Akamai's patents, but still has a ways to go. Limelight is also being sued by Level 3 Communications over a patent dispute.
$30.3 million: Second quarter revenue tally, up 22 percent from a year ago.
$124.9 million: Estimate for Limelight's 2008 revenue according to Thomson Reuters. $103.11 million: 2007 revenue.
1,300: Customers reported by Limelight in the second quarter. 2 terabits per second: Network transmission capacity that Limelight expects to hit this quarter.
$30 million to $32 million: Revenue projected by Limelight for the third quarter.
So what do we make of this company, which has a market capitalization of about $350 million compared to Akamai's $3.9 billion market cap?
The reaction to Limelight's quarter was pretty good. To keep the Olympic theme going one analyst--Katherine Egbert from Jefferies--gave the quarter a silver medal. Oppenheimer analyst Srinivas Anantha noted that both Limelight's top and bottom lines were better than expected. Meanwhile, Limelight is winning large deals--an indicator that the company's litigation with Akamai isn't that bad of an overhang. To wit, Limelight won renewals from the likes of Microsoft, Netflix and Walt Disney.
In fact, Anantha reckons that Limelight is facing price competition, but can still manage to gain share on Akamai. It's also becoming more clear that Akamai's line that IP traffic growth hurt its quarter may be a reflection of good old fashioned competition.
On the Internet traffic growth question Limelight CEO Jeffrey Lunsford said on the company's second quarter conference call that "we are not seeing an overall slow down in IP traffic internet wide."
We believe we are going to continue to see existing traffic growth. We believe that with Limelight Networks platform we are well positioned to capture more than our fair share of the large wave of new online content that will result from this long-term trend. Regarding the business environment we’ve received many questions about how the current economic environment might impact our customer base.
We are seeing tighter venture funding for some of the types of start ups the typically need CDN (content delivery network) services. As a result we are beginning to emphasis quality of customer over quantity and are modifying compensation plans and tightening up our payment delinquency tolerances. With all that said we still believe the emerging market segment is an attractive one and that managing a diversified portfolio of customers with disciplined operations is the right strategy.
Limelight's conference call reveals a bevy of questions about Internet traffic and Lunsford fielded most of them. The takeaway: Limelight could become a real pain to Akamai if it can carry its Olympics momentum forward.