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Here's the Secret Sauce Behind Limelight Networks' Q2 Surprise

Computer money

Content delivery specialist Limelight Networks (NASDAQ: LLNW) presented a fine second-quarter report last week. The company beat Wall Street's earnings and revenue estimates, management raised its full-year revenue guidance by 1%, and share prices surged more than 12% higher the next morning.

Even better, CFO Sajid Malhotra took the time to connect with yours truly on the phone to dive deeper into what made Limelight tick this quarter.

Here's what I learned:

How to control costs without ditching quality

In the earnings release, Limelight kept coming back to the fact that it is winning higher-quality customers while also reducing its capital expenses. I had to ask Malhotra how his company can deliver good service despite a shrinking capital-expense budget.

The answer, he said, is found in a disciplined approach to R&D and equipment purchases:

Our servers can push a lot more traffic today, you know, sixfold or sevenfold what they were doing just two years ago. As a result, we can deliver the same or better results to our customers without investing more capital. Or, for a little bit more capital, we can deliver a lot more bits.

Using off-the-shelf systems instead of expensive custom-built rigs also makes a difference. This is true both for Limelight's main line of business -- delivering large files and media streams through networked storage and content-management systems close to major internet connection hubs -- and for the newer push into edge computing, which puts number-crunching horsepower right next to those digital storage bins. As Malhotra explained:

Our investments are optimized. You know, we're not spending $40,000, $50,000, $100,000 on a server, like I've heard some of our competitors do, to get you a good outcome. We're using standard servers and standard parts to get to a good outcome.

That's what industry standards and best practices are for: letting people and companies do their best work without worrying too much about the details of their technical setup. Limelight used this simple strategy to help push its capital expenses below $4.3 million in the second quarter, 9.3% below the year-ago period.

Computer money

Image source: Getty Images

The race to the bottom is over

As I mentioned above, Limelight is also pushing its client mix in a more profitable direction.

The content delivery industry is a brutally competitive sector, with a handful of inveterate specialists like Limelight and larger rival Akamai Technologies (NASDAQ: AKAM) , but also a plethora of solutions thrown together by general technology titans, or by the content producers and distributors themselves.

Limelight used to get involved in a lot of cost-focused negotiations, but has now found peace with the idea of leaving the downright unprofitable deals unsigned. Malhotra said:

I'm dropping my lowest-priced customers who don't care about quality, they just want

As a direct result, Limelight's average revenue per customer rose 25% above the year-ago period, landing at $73,000 per client. "It is my belief that we command the highest [average revenue per user, or ARPU] in the industry," Malhotra said on the regular earnings call with financial analysts.

We'll see how Akamai compares when it reports its own earnings next week. That company doesn't generally report ARPU on a quarterly basis, but analysts might push Akamai's management to provide it, now that Limelight's impressive figure is fresh in their minds.

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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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